Healthcare in the News (Part II)

Now that we have a little bit of an idea of the current issues prevalent in the healthcare industry, let’s take a look at what the government is currently proposing to solve them. Different congressional offices have their own versions of healthcare reform. Although each is different and has its own nuances, there’s a fundamental goal within each – to reduce the overall cost of healthcare in the US by reducing the number of uinsured people. Furthermore, there are a few underlying trends in each of the proposals, and you can expect a few changes to certainly when one of them passes:

1. Increased competition for insurance companies – In order to provide consumers with more choice, the regional tendancies of indurance companies will likely change. In fact, you can already see this change occurring. Recently the justice department repealed the decades old immunity that insurance companies had from antitrust action. This will make it more difficult for a single insurance company to have a stranglehold on a given region of the country.
2. More Insured People – This is the fundamental basis of the whole proposal – getting more people insurance. Either through changes in the tax structure or a public option, the government aims to significantly increase access to health insurance.

The Winners and Losers

Like any other major government implemented reform, there will be winners and losers in the process. I was recently reading an article in BusinessWeek about who stands to gain and lose in the reform. The article (link below) had an excellent breakdown of how the estimated $900 billion program will be paid for.

Winners

1. Providers (i.e. Doctors and Hospitals) – The healthcare providers are being asked to give up very little in this reform. At the same time, they stand to gain a great deal if more Americans have easier access to healthcare. This combination bodes very well for the industry and can potentially help ensure that quality of care does not suffer. However, the fact still remains (as mentioned in the article) a vast majority of health spending still occurs at the providers, and with the reform, that percentage will likely increase.
2. The uninsured – Obviously…

Losers

1. Insurance Companies – The health insurance companies are squarely in the crosshairs of the government. They will be asked to sacrifice the most in order to bring the cost of healthcare down. The companies have recently come out to say that the cuts they’ll have to make will inevitably result in increase premiums for those who are already insured. However, the counterargument here is that the government will help create a whole new group of potential customers that were previously uninsurable. I personally think the jury is still out in if that will actually help the companies. Right now I feel that they will be big losers in the battle.
2. Drug Companies and Device Makers – This pharmaceutical and device industries has already committed to absorbing $120 billion in the cost of the reform. The cost of prescription medication and equipment will have to go down to provide the reasonable cost access to medical care that the government is hoping for. Margins look like they’re going to be tighter for big pharma.
3. The Taxpayer – Yes, you and I are going to have to pay at least somewhat for the reform. Some people may disagree with me, but it’s still unclear exactly how much they will have to pay. Pres. Obama has emphasized the notion that any reform must not add to the federal deficit, but instead the reform must be paiud through cutting of wasteful spending in existing programs. I’m not sure if that’ll be possible with the political process, however.

Investing in the Reform

A change with this magnitude obviously has major implications. This is especially true for the companies that are involved in the reform. I think there are several ways to play the market that can help you capitalize on the upcoming changes.

When I was thinking about how to invest for the reform, I thought about the fundamental factors that are most likely to be largely impacted with the looming changes. Here are a few of the assumptions I made:

1. Something’s actually going to change – there’s way too much invested politically in the process so far for nothing to occur. Something’s definitely going to happen.
2. More people will be insured – That’s the whole point of the reform – make healthcare more affordable and accessible to the masses. I think you’ll see more people going to the doctor, and taking more medication.

With these assumptions I did some digging into the healthcare industry to see who would succeed. It’s actually somewhat difficult to do this because many sectors are making concessions as part of the reform; pharmaceutical, insurance, and medical device makers all stand to lose out to varying degrees. The easiest potential winner here would the providers as I had mentioned earlier. I like Lifepoint Hospitals (LPNT) and Community Health Systems (CYA) in this situation.

However, there is another industry that I think stands to benefit hugely from this specific type of reform. Because the fundamental change I see occurring more insured people and tighter margins for the insurers, insurance companies will be aggressively looking for ways to cut costs. One of the easiest ways for this to occur is to cut prescription drug costs, and there are companies out there that specifically focus on making drugs more affordable for consumers – Pharmacy Benefit Managers (PBM’s). PBM’s use the economies of scale to negotiate better prices for drugs for their members. They enroll members and work with pharmacies and pharmaceutical companies. They also leverage more efficient distribution systems for delivery of the drugs. Instead of going to a local pharmacy, a member can get his/her medication through the mail, thereby reducing the cost of the medication.

Like I mentoned,the bare bones reform that will occur is the reduction in margin for insurance companies. Cost cutting will become a huge part of the game for both the insurance companies, and the employers that hure those companies to provide insurance for their employees. I think you’ll see PBM’s playing a much larger part in helping drive costs lower. Companies like Express Scripts and Medco Health Solutions stand to benefit hugely with this increased demand for their services, and I believe investing in either can make you money in the longer run.

The healthcare reform that’s in the works will be one of the biggest reforms we’ve had in a long time. But in change, there is opportunity. I think there will be many winners over the next few years, and, as a whole, I think the reform will be good for the country. Nonetheless, it never hurts to capitalize on it for yourself and try to make some money out of it J Take a look at PBM’s – I think it’ll be worth your while.

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.

Healthcare in the News (Part I)

Yep, I’m going there. I’m sure everyone has been hearing about it. Well, at least the readers in the US have been. Healthcare reform – President Obama’s top domestic priority – has been in the forefront of people’s minds these days. Understandably, many people understandably have strong opinions about it. So, I figured I’d share my thoughts on the topic and provide insights on potential investments opportunities that can come of the inevitably sweeping changes.

The Problem

The issue with healthcare today is, in my mind, very simple – it’s too expensive and not enough people have it. The US has one of the highest levels of uninsured people of all industrialized nations. That seems a little strange considering one would think in an open market economy, businesses would find a way to tap into so many potential customers. Furthermore, when inflation for healthcare costs is well into the 20%+, many times overall inflation, you know there’s a problem. Like any problem with this level of complexity and magnitude, there’s more than one reason for it. Here’s what I think are some of the major reasons:

Why I Think Costs are High

1. Tort Reform – I’m a firm believer that the way healthcare lawsuits are treated in US courts is a major contributor to rising costs. The reason I believe this is because of the cascading effect that healthcare litigation costs has on cost of care. When a doctor is afraid that a mistake he makes can cost him/her millions in lawsuits, he’ll always play it on the safe side. This means ordering potentially unnecessary tests that may have already been performed. This in turn creates additional costs for insurance companies that have to pay for these tests and eventually trickles down to the consumer. Furthermore, malpractice insurance rates become a huge factor in the costs for providers. Again, when a doctor has to pay $100,000+ a year in malpractice insurance premiums, these costs will also trickle down to you, the consumer in higher prices for doctor visits and procedures.
2. College, I went to a lecture given by the CEO of the Carle Hospital System – one of the biggest healthcare providers in central Illinois. His take on healthcare costs, one that I agree with, was that the cost of healthcare is largely driven by who can pay. In other words, there’s a vicious cycle going on where uninsured people cannot afford for the healthcare that they inevitably need. When they can’t pay, the hospitals must make up the difference through charging those who can pay more. Well, eventually the insurance premiums of those who can pay will go up, and this will likely lead to more people being uninsured and the cycle continuing. The reason why you have to pay $400 for that night in the hospital isn’t because it’s the Four Seasons. It’s because the guy in the room next to you can’t pay the $400, so you have to make up the cost.
3. Inefficiencies – Take this from someone who’s been consulting for healthcare companies for a few years now – there are TONS of inefficiencies out there, especially in insurance. These companies are 10+ years behind on the innovation curve as most other industries, and that is adding significantly to costs. Leveraging technology to increase the efficiency of this admittedly complex industry, I feel, will definitely help solve the problem.

Why I Think the Number of Uninsured is High

1. The Catch-22 Again – Like I mentioned in point 2 above, there’s a vicious cycle of the uninsured driving costs up thereby leading to more uninsured is never-ending. This needs to be addressed directly before any improvement can be expected
2. Lack of Competition – The health insurance industry is very regional. I was reading recently that 80% of people in the US have 5 or less health insurance companies to choose from. This is despite the fact that there are literally dozens out there. The primary reason for this is regulation differences from state to state. This leads to difficulty for companies to reach outside their respective region to compete with others and needs to change. The regulatory landscape needs to become more uniform, and insurance companies need to stretch out and compete with each other more. This will help bring down costs and get more people insured. Just look at what competition has done with pharmaceutical retailers. With the advent of Pharmacy Benefit Mangers and the fierce competition between retailers like Wal-Mart and Walgreen’s, you can now get a generic prescription filled for $5….ten years ago, that would’ve been unheard of! We need to be able to get this type of competition in place for insurance as well.

The problems associated with healthcare are obviously more complicated than the 5 points I mentioned above. But I feel that if we just address these 5 points, we can go a long way to solving one of the most prevalent social issues of our generation. For my next post, I’ll discuss the solutions that the government is proposing and where those solutions are addressing those 5 points. I’ll also talk about how you can invest to take advantage of the reform.

In the meantime, what do you think the solution should be? Do you agree with the 5 points above? Why or why not? I’d be happy to start a dialogue for any comments that you guys make.

Playing the Dividend Game

Before I get started, I wanted to first apologize to the InvestingDecoded world for my recent absence. I know I haven’t posted in over a month. I assure you that I remain committed to InvestingDecoded and helping everyone learn as much as possible about investing. Many of you may already know the reason for my absence, but I’m back now, and I promise to be posting away regularly :-)

Now, let’s get to the fun stuff – dividends! I wanted to talk about dividends today because in a market like this, investing in stocks that pay dividends is a common ‘safe’ strategy. Investing in a stock due to its dividend (or potential dividend) is usually called a ‘Dividend Play’. Let’s discuss what a dividend is and how you can make your own plays.

Sharing the Love

A dividend, in its simplest form, is a piece of the profits from a company paid out to its investors. When a company makes money, it has options on what to do with it. It can take that money and reinvest it in the hope that it’ll make a return in the form of a higher stock price in the future. This reinvestment can be anything ranging from expansion to paying down debt. Or, the company can return the money to investors in the form of a dividend.

When looking at a stock, you can easily see if it pays a dividend. These are displayed on a per share basis. You should also look at what’s known as the “Dividend Yield”. This is merely the annual amount paid as a dividend as a percentage of the stock price. The yield basically tells you how much of an annual return to expect from the dividend along if you bought the stock right now.

Who Pays Dividends?

You may have inferred from the above paragraph that not all companies pay dividends, and you’d be exactly right (pat yourself on the back :-)). A company is not required to pay a dividend, and many don’t. The ones that don’t generally tend to be companies that are significantly growing which requires them to reinvest their profits (a lot of cutting edge technology companies fall into this category). The companies that tend to pay dividends are those that are matured and are in relatively low growth industries. Examples include Coca-Cola, Altria Group (formerly known as Phillip Morris), and Boeing. These guys have been around long enough and have reinvested so much of their money that they can now afford to give some it of it back to investors.

There’s also another class of companies that pays dividends – and these guys tend to pay a lot. These are companies that tend to pay most or all of their earnings as dividends as a way to attract investors and are usually specific to certain industries. One such example is the Oil Shipping Industry. This is a very cyclical industry, and during good times, dividend yields can run as high as 20% - that’s right you’ll get a 20% return on your investment from dividends (the price of the stock can obviously affect the actual return). That makes for a very interesting proposition for investors!

How To Play Dividends.

Investing in dividend paying companies isn’t hard. You can just see the dividend amount and yield and decide if it fits with your investing strategy. But there are some things that you should be aware of before investing in a company primarily due to its dividend:

• Companies aren’t required to pay a dividend. They can cancel it at any time and doing that usually causes the stock prices to drop significantly. The primary reason is obvious – the risk/reward profile of the stock changes without the dividend, causing investors to sell. Another, more subtle reason is that there are many mutual and ETF’s that primarily invest in dividend paying companies. If one the companies they own cancels that dividend, they are forced to sell, sending the price down.
• Dividends are paid at a set schedule, usually quarterly. To qualify for receiving a dividend on a given quarter, you have to be a holder of the stock on a given date known as the Dividend Expiration Date. Only shareholders on record as of the Dividend Expiration Date are eligible to receive the payment.
• Focus on the dividend yield of the company more than the actual amount paid. Companies tend to try to keep the yield constant and consistent with industry standards. That means that if the price is going down, the chances that the dividend will be cut is increased.
• Take a look at the dividend history of the company. This usually gives a strong indicator of how the company will pay dividends in the future. Companies that pay dividends erratically may not be the way you want to go. On the other hand, there are companies (Altria is a great example) who not only pay dividends regularly, but also have a consistent record of increasing their dividends. Those are the guys you want to get into for dividend plays.
• Companies can also declare Special Dividends. These are one-time disbursements of profits to investors and are usually difficult to predict. I would tend to stay away from playing the Special Dividend game where you buy a stock in the hopes you’ll get a special dividend payment.
• Many companies offer Dividend Reinvestment Plans (DRIPs). This allows you to automatically reinvest your dividend to buy more stock and not receive the actual cash payment. You can decide to participate in a DRIP through your broker on a per company basis.
• Dividends are usually treated as ordinary income for tax purposes. That means that you have to pay taxes on them just like the taxes you pay for interest accrued from a savings account. You should receive a report from your broker telling you how much you were paid in dividends for tax reporting purposes.

Overall, dividends are a great way to get predictable income form your investments. In my investing, I try to invest more in companies paying dividends because that shows me a certain amount of stability in the business. In this environment, that’s worth a lot more than usual.

Questions/Comments/Feedback?
Please don’t hesitate to let me know of any questions or comments you have about this post or any other. If you want me to write about something else investing related, do let me know!

The Standard Disclaimer:

The stuff I just wrote above is my opinion and my opinion only. Please do not take it as fact. Perform all necessary research and analysis prior to acting on anything I've said above. This includes consulting with a financial advisor.