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An IPO to Play the Aging Boomers

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By Tom Taulli, InvestorPlace Writer

NEW YORK ( InvestorPlace) -- Back in the 1980s, U.S. companies moved away from defined-benefit pensions to defined-contribution, or 401(k) plans, essentially pushing the responsibility for retirement saving to employees. Of course, the main reason was to help reduce corporate costs.

Interestingly enough, the same trend is happening in the U.S. health care industry: Employers are moving away from group-based plans to individual arrangements.

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  • That's creating opportunity for health care operators. Just take a look at Extend Health, which has the largest exchange for Medicare coverage and is preparing for a public offering. The lead underwriters include Morgan Stanley, Barclays and Wells Fargo.

    Extend Health's platform focuses primarily on programs like Medicare supplement, Medicare Advantage or Medicare Part D prescription drug coverage. These involve some federal subsidies and offer additional benefits, such as dental.

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  • For the most part, Extend Health allows employers to transition post-65 retirees to get the same or better health coverage -- at a lower cost. Its system uses sophisticated analytics to evaluate coverage of more than 75 carriers, which involve more than 4,000 health plans.

    Consider that Extend Health has 30 of the Fortune 500 as customers already. Some of the biggies are Caterpillar (CAT), General Motors (GM), Honeywell (HON) and Whirlpool (WHR).

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  • Based on government data, Extend Health's addressable market opportunity is 12 million retirees. So far, the company has roughly 171,000 active core members enrolled.

    For the year ended June 30, Extend Health posted revenues of $51.1 million, up from $44 million in 2010. Pretax earnings came to $9.96 million.

    As should be no surprise, Extend Health has plans to move aggressively into new categories of the Medicare market. These include early retirees who aren't yet eligible for Medicare, active employees with group coverage and Medicare enrollees who don't have employer-sponsored health care coverage.

    All in all, the market potential is enormous. Keep in mind that about 10,000 people per day reach 65 and become eligible for Medicare. In fact, this segment of the population is expected to go from 40.2 million in 2010 to 54.8 million by 2020. And as the costs escalate, employers will have little choice but to look for alternative solutions like Extend Health.

    Tom Taulli runs the InvestorPlace blog IPOPlaybook, a site dedicated to the hottest news and rumors about initial public offerings. He is also the author of All About Short Selling and All About Commodities. Follow him on Twitter at @ttaulli. As of this writing, he did not own a position in any of the aforementioned stocks.

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  • This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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