In my opinion, health care is the most difficult industry for novice investors to understand. With so many stakeholders involved in developing and manufacturing any given medical product, it is often hard to obtain a firm grasp of what is shaping the future of this industry. In this series, I will be analyzing the health care industry using a top-down approach to help you understand the current and future environment that will determine the success or failure of the efforts of health care companies.
Obama’s Health Care Plan
Probably the most capricious entity is the federal government. With many political figures working on so many social and political agendas, the topic of health care can often become fad-like within Congress; however, the Obama Administration has made it clear that health care is close to the top of its agenda. Obama’s plan will provide millions of Americans with stronger health care coverage while lowering the cost of health care per family by as much as $2500. Oh, and he wants to do all that without raising taxes to pay for the coverage. This plan may prove to be a double edged sword for the health care industry.
Personally, I feel that this is too ambitious of a goal to not have any ramifications on taxes and health care companies. Many companies will be hurt by the increased competition and lower margins and will be pressured to lower prices, possibly discouraging innovation as well. Obama plans to achieve this $2500 in savings mainly by increasing investment in health care IT and by increasing competition in the insurance industry. I realize that an increase in the use of health care IT would lower expenses through the elimination or reduction of administrative inefficiencies, but to the tune of $2500 per family? Unrealistic. Regardless of my views, Obama still plans on providing health care insurance to millions of people who are currently lacking coverage.
What will this mean for health care companies? Well to start, managed care organizations will benefit greatly with the increased number of people with coverage. Companies like Tenet Health Care (NYSE:THC) and Universal Health Services (NYSE:UHS) will have a larger base of paying clients that are utilizing their services rather than opting out of care, resulting in higher revenues. Because of the weak economy, more and more people do not have enough money to pay for medical services they should be receiving, but if Obama has his way, insurance companies will provide sufficient, preventative care for their clients at a lower cost. But if more people are receiving care at a lower cost, someone will be feeling the pains of government involvement here.
Some insurance companies would also come out on top, however, at a price. Since Obama wants to increase competition within the insurance industry, companies like Wellpoint (WLP) and UnitedHealth Group (NYSE:UNH) will enjoy higher revenues, but at the cost of much lower margins and to the point where some insurance companies may not be profitable anymore. Insurance companies would be fighting each other for business from major employers by offering painfully low rates, but in a health point of view, the American people will be better off under Obama’s plan.
Every health care company is dependent on the Food and Drug Administration. The Administration currently regulates over 180,000 companies. This represents roughly 25 cents of every dollar each American spends. It is the FDA’s job to make sure all of the drugs you take, all of the medical devices you use, all of the facilities that make health care products for you, and all of the food you eat (less meat and poultry) are safe for consumption. Pharmaceutical companies can spend millions to hundreds of millions of dollars on clinical trials developing drugs and medical devices. If the FDA deems any of these products insufficient for consumption, millions of dollars could have been wasted in development, and lawsuits could ensue if products are mislabeled or hazardous. Unfortunately for us, the FDA has only 9,300 people to keep an eye on the safety and efficacy of every drug marketed in America, and every manufacturing facility.
Ever since the Vioxx incident earlier this decade, the FDA has strengthened its regulation process and added a Phase IV clinical trial that studies the affect of the drug over the long run. The fact that they are increasing regulation on products and are severely understaffed means that health care companies will be dishing out more money for clinical trials which will also mean a longer wait for results. Good news though, as I was browsing the FDA website, I ran across an application page asking for people with all different areas of expertise to apply. After a few thousand more employees, the clinical trial process may speed up and the FDA may finally be competent enough to handle the 180,000 companies it regulates.
It is important to have a strong understanding of what is shaping the health care industry when you are trying to a valuate health care company. While researching companies, keep in mind the agenda of the government and the FDA and how they influence the companies’ operations and decisions. Please keep an eye out for my next article that will highlight more key trends within health care.
Parts two and three of this article will be released on June 4th and June 7th respectively.
- Brendan Stevens