Health Care Stocks Anticipate Weak Reform Bill, If Any

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 |  Includes: ABT, AET, ALG, ANTM, ARTC, BAX, BDX, BKD, BMY, CI, CNMD, CYH, ESC, GSK, HCN, HMA, HUM, IYH, JNJ, KND, LLY, LPNT, MDT, MRK, NHC, NUVA, NVS, ODSY, PFE, SKH, SNN, SNY, STJ, SUNH, SYK, THC, UHS, UNH, VHT, WMGI, XLV, ZBH
by: Donald Johnson

Speculators seem to be betting that a watered down health insurance reform bill won’t hurt health insurers, hospitals, drug makers or medical device and supply manufacturers.

Stocks for almost all of these health sectors and for exchange trade funds that track health stock indexes turned higher last week.

Why?

  1. Congress is not going to get health bills through the Senate or the House in face of strong opposition by a minority of Democrats in both houses. This means opponents of the health insurance reform bills will have at least 45 days to convince members of Congress and the public that the bills favored by the president and his hard left supporters in Congress are a bad idea.
  2. It is very unlikely that Congress will create a public option health plan, or Government HMO (Fannie Med). The votes aren’t there. This is a bit bullish for health insurers over the short term. White House talk about taxing insurers that offer gold plated health benefit plans makes no sense because few do. If such taxes were enacted, insurers would stop offering or administering such plans, and self-insured employers probably would drop them as long as union contracts didn’t lock them into such plans.
  3. If the very liberal Coastal Democrats who lead Congress and most of the five commitees drafting health insurance legislation want to get the support of Democrats from Western, Midwestern and Southern states, they’ll have to up Medicare payments to providers in those states. This is bullish for hospital chains, which operate mostly in the fly-over states.
  4. The Congressional Budget Office Saturday threw cold water on the idea of putting MedPac, a panel of self-interested health care and medical experts who would be subject to tremendous political pressure from Congress, in charge of deciding what insurers would cover and how much they would pay for procedures. The panel would save only $2 billion out of trillions over 10 years, the CBO guessed. And it was being generous to the idea that MedPac would save anything. This is good for drug and medical device makers, because it lessens the threat of new price and utilization controls on their products.
  5. While Intrade.com bettors think there’s at least a 46% chance that some kind of health insurance reform will be enacted before year end, the polls are showing that Americans are increasingly opposing the bills before Congress. The politicians who created the laws and regulations that make Medicare, Medicaid, SCHIP and state and federal regulations of health insurance markets unworkable failures are promising to fix the health markets. They have less and less credibility every day.
  6. Proposals to tax millionaires to pay for covering the uninsured and increasing benefits for others are in trouble, if not dead on arrival. The economy’s in no shape to be stalled by tax hikes, and there appear to be enough Democrats opposed to the tax to stop it.
  7. While the so-called Blue Dog Democrats are stalling health insurance reform for economic and ideological reasons, the Congressional Black Caucus has made it clear that it won’t support a bill that the Blue Dogs will support. Throw in the opposition by anti-abortionists who don’t want the legislation to use taxpayers money to pay for abortions, and you have a pretty complex political problem for President Obama, Sen. Majority Leader Harry Reid (D-NV) and Speaker Nancy Pelosi (D-CA). While the Speaker claimed Sunday that she has the votes to pass health insurance reform, few believe her.

Some Democrats are saying that drafting health insurance reform bills is 70% to 80% done and it won’t take long to get a bill. Other Democrats are saying they want to take the time to write good legislation.

The question is, can the Democrats and a few Republicans resolve the last 20% to 30% of the issues that need to be agreed upon to get a bill?

It doesn’t look very good for health insurance reform at the moment, but some kind of a bill may pass in the next year or so, if not this year. Presidents Reagan, Clinton and Bush II all enacted major health legislation in their third and later years in office. All three bills have been financial and health care disasters.

Charts for health insurers are here.

Charts for hospital chains are here.

Charts for drug makers are here.

Charts for medical device and supply makers are here.

Charts for long-term care stocks are here.

Chart for health stock exchange traded funds are here.

Click on a chart to see a gallery of charts for a stock or ETF.

Disclosure: I own BDX and options on STJ.