US health insurers

US health insurance stocks have performed extremely well.  Even if you had bought the worst ones, performance would have been similar to the S&P 500.  Why?

While the overall US healthcare system is dysfunctional relative to those in other developed countries, a broken healthcare system doesn’t explain why insurance stocks have done better than hospital stocks.  While hospitals engage in abusive practices such as surprise out-of-network medical bills (balance billing), hospital stocks have been mediocre investments.  A better supported explanation is scale.  One manifestation of scale is in dialysis treatment, a unique market where Medicare is the biggest negotiator with at least 90% of patients.  Commercial payers, with their lack of scale in this situation, are charged many times what Medicare pays.  SIRF’s analysis puts it at roughly $1,050 per treatment versus $250.  Of course, no health insurer enjoys 90%+ market share so their scale advantages are smaller.

Here’s a look at how market cap (a proxy for size) correlates with return on assets:

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