What Stocks Can I Own to Benefit From Medicare?

Medicare enrollment surged from 48.9 million beneficiaries to nearly 56 million beneficiaries between 2011 and 2015, and with 10,000 baby boomers turning 65 every day, tailwinds that support Medicare Advantage and Part D aren't likely to fade soon.

In this clip from The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to explain why companies like UnitedHealth Group (UNH 1.69%) and Humana (HUM -1.51%) could be the best way to invest in rising Medicare enrollment. 

A full transcript follows the video.

This podcast was recorded on Sept. 14, 2016.

Kristine Harjes: Around $3 trillion each year is spent on healthcare in the U.S. And that's only growing. About $0.20 for each of those dollars supposedly comes from Medicare, which added up to about $587 billion in 2013. Meanwhile, that's expected to grow substantially. The Congressional Budget Office expects that net Medicare outlays will increase by 67% by the year 2024, which would bring it to $866 billion. Todd, as you mention, you have an aging population, you have healthcare becoming more expensive, and that does mean that Medicare spending is going up.

Todd Campbell: Right. It's tough sometimes for investors, because we're trying to figure out, what's the purest way to invest in a particular area where we think that growth is going to be coming. In Medicare, it's difficult, because most of the large insurers are diversified private insurers. They're providing employer-sponsored insurance, they're participating in the Obamacare exchanges, they're running Medicare programs for various states, and then they're also doing these Medicare offerings, selling these Medicare plans. I think for investors who want to have that diversification across the entire health insurance industry, a company like United Healthcare can make a lot of sense. And then for people who might be interested in more of a pure play on Medicare, consider Humana, because Humana gets 73% of the revenue directly from Medicare-related products, so, part C and part D plans.

Harjes: United Health is a really interesting one, here. Their Medicare supplement numbers, and their Medicare Advantage, that's handled by OptumRx, and that has been a humongous driver of their revenue growth lately. If it keeps up with current pace at that growth, this OptumRx segment of the company could catch up to the non-Optum part. So, UNH is becoming more and more of a way to play Medicare.

Campbell: Right. It's a services and technology company, too. As we get to the point where we're trying to find out the best ways to provide the right treatment to the right patient at the right time, insurers are starting to play a larger and larger role in helping to accomplish that. That's obviously creating new revenue streams, and Optima is a great example of how that is playing out.

Harjes: Exactly. So, that's one route you can take -- looking at the insurers. Another way that an investor can look at this is dive into the figures that are published publicly about how and where Medicare spends most of its money. 14 drugs costs Medicare a billion dollars or more in 2013. These are for your chronic conditions like diabetes, depression, high cholesterol. Some of the names that stood out to me in this list, the first one was Nexium. Nexium was the costliest drug in 2013. It cost the system $2.5 billion to cover to 1.5 million Medicare patients that were being prescribed the drug. This is an AstraZeneca drug, although Pfizer introduced a generic back in 2015. If you look at the numbers for Nexium, it's still making quite a bit of money. That generic came out in February of 2015, the Nexium brand still brought in $2.5 billion for AstraZeneca in 2015. Even though this was down from 2014 numbers, this is still a drug that's very common among Medicare recipients. In 2015, it was still the second most expensive to the program.

Another one that stood out was Sovaldi, which we talked about a bunch on this show. This is Gilead's hepatitis C drug. This was actually, in 2014, the No. 1 biggest expense drug for Medicare, weighing in at $3.1 billion. That was to treat just 33,000 beneficiaries. That's compared to roughly 1.4 million for Nexium. So, interesting dynamics there.

Campbell: You know, what's interesting here, too, Kristine, for investors, we also have to remember that Medicare, yeah, there's a large population of elderly people, and they're obviously going to be demanding a certain amount of drugs. But these companies are not pure plays. And there's risks that could be associated with that. We've all seen in the news over the course of the last year, all this payer pushback that could lead to regulatory changes that put the kibosh on future price increases for drugs.