As I’m sure you’ve already heard – the landmark Health Care reform legislation was recently signed into law by President Obama. Regardless of your viewpoints on this reform (and I’m sure everyone has their own opinions), this is arguably the most impactful piece of legislation of our time, and with it comes major changes to the companies involved in healthcare. As I’ve said before, with change comes opportunities, and in true InvestindDecoded fashion, I wanted to discuss what investing opportunities this legislation brings about.
The Low-Down
A few months ago, I wrote about the reform when it was still in its negotiation stages. At the time, I gave my viewpoint on how you could invest in the reform. Now that we have an idea of what the final legislation will look like, I will revisit those predictions and see if they still hold up. Before we can do that, however, let’s take a look at some of the key points of the legislation:
· The primary goal of the legislation is to provide affordable health coverage to some 32 million additional Americans.
· State-based insurance exchanges will be created to enable the uninsured, small businesses, and self-employed to create ‘groups’ through which they can purchase insurance at a lower cost than if they tried to purchase it individually.
· Most larger businesses (those with 50 or more employees) will be fined $2,000 employee/year for not providing coverage for all employees.
· Uninsured individuals who do not purchase coverage will be fined $695/year.
· There will be cuts made to Medicare reimbursement but additional coverage made for Medicaid.
· Insurance companies will no longer be able to deny coverage based on pre-existing conditions or drop coverage for members who get sick.
Winners and Losers
Overall I think that this final legislation is not all that different from the proposed legislation I discussed a few months earlier. There seems to be some distinct winners and losers and, although many of the winners have already seen their stock prices rise significantly, I still think there’s long-term upsides.
Winners
· Pharmacy Benefit Managers – In my mind, these guys are the real winners here…big winners. My prediction is that there will be serious emphasis put on cost-containment for health coverage. Now that coverage is more of a commodity and less of a luxury, margins will be squeezed for insurers. Therefore, they will be looking to save every dollar they can. PBM’s are the ideal way to save money on prescription medication for these insurance companies. I think names like Express Scripts and Medco will see some serious upside. However, one that I think will be the clear winner in all this is CVS Caremark, who I think will win on both the PBM and Retail pharmacy side.
· Pharmaceutical Companies – Drug companies came away like bandits in this legislation (I’d say this is thanks to some nifty deal-making with the government early on in the legislative process). These companies will see an influx of 32 million new customers that would previously not buy their products. On the other hand, they have come back with token concessions as payment for the new demand. Right now, there doesn’t seem to be a single big winner. A pharma ETF would be a perfect investment here.
Losers
· Health insurance Companies – The health insurance industry has just been turned on its head. These sweeping reforms will impact the likes of WellPoint, Aetna, CIGNA, United Healthcare, etc. drastically. The first challenge I see for them is increased cost due to the types of members they will now have to insure (i.e. those who are extremely sick and would otherwise not be able to get coverage). Furthermore, they will face increased competitive pressures due to the exchanges that were set up as well as opening up the market to more competition that was done through previous legislation. Yes there are now 32 million new potential customers. But I think the pricing pressure and increased cost structure will their once-lofty margins and, consequently, shrink profits.
My Reform Portfolio
With all this said, I have a simple portfolio that I’d recommend for reform. Now keep in mind many of these stocks have already had a significant run-up and may experience some near-term weakness (next time listen to my recommendations that first time I make them). But I think long-term there’s still opportunity here. This portfolio will give you a fairly diversified healthcare setup while taking advantage of the true winners (as I predict they will be):
1. 25% - CVS Caremark
2. 25% - PBM ETF (to diversify in case things don’t go well for CVS)
3. 30% - Pharmaceutical ETF
4. 20% - Biotech ETF (to get more leading edge pharmaceutical exposure)
What are your thoughts?
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.
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