General Electric (GE) is expected to finally begin widening profit margins in its health care businesses as the company begins to meaningfully pare down costs and boost profits through new partnerships, William Blair analyst Nick Heymann said in a Friday phone interview.
GE's most recent deal in its health care businesses was Thursday's announcement that it is teaming with Accenture (ACN) to transform the way the country processes medical claims, as Real Money reported. The two companies plan to combat the significant amount of lost sales in the medical-claims industry -- which amounted to roughly $2 billion last year -- by cracking down on fraud and the costs of re-processing claim requests. Based on GE's estimates, the current industry model wastes roughly that amount in unnecessary re-processing fees tied to medical claims, which are denied about 20% of the time
(GE stock is held in Jim Cramer's Action Alerts PLUS charitable trust.)
"Margins are going to go up and costs are going down," Heymann said of profit margins in its health care businesses, which have lagged stubbornly at roughly 16% for the past few years. But the company now expects the segment, which pulled in $4.2 billion in the first quarter, to hike margins by about 2% by 2018, according to the division's chief, John Flannery.
"The business is getting better and it's clear that the big focus under Flannery now is to accelerate revenue growth through IT and Life Sciences," Heymann said. GE's Life Sciences division recently formed a scouting partnership with Uppsala BIO -- a nonprofit foundation associated with the eponymous university in Sweden -- to look for potential acquisition targets in health care technologies and equipment.
"Its profitability will lift long-term service margins, and data analytics are being used to improve customer services," Heymann said, noting he expects GE's health care sales to grow at a pace of roughly 4%-6%, annually, while earnings tick up in the "high single digits, low double digits."
Heymann noted that GE currently operates mostly in developed countries and there is much growth potential, particularly in Life Sciences, to explore new ventures in China and emerging markets.
He also said the deal with Accenture could prove significant as the U.S. health care industry begins to adopt newer and more efficient forms of managing data.
"Almost all the states in the country are moving to writing prescriptions online, and they are going to try and utlitize that data with patient records and imaging data so you will have a portable profile," he said. "One side of that is patient well being, but it will also eliminate fraud and mismanagement," leveraging Accenture's consulting business and GE's software and DenialsIQ algorithm designed to scale down claims-processing inefficiencies.
"Its definitely a source of incremental value that GE can provide with Accenture," he said.