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 Recently the justice department repealed the decades old immunity that insurance companies had from antitrust action.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.