Stocks that Could Benefit from Health Reform

The ongoing debate about health care has become more focused on ideological lines than on what realistically can and should be done. Though not surprising, it is unfortunate.

It would be wonderful if the conversation shifted to what changes can realistically be made and what changes should be made to prevent a worsening crisis. Here are some ideas, along with potential investment plays.

Big Pharma Is Not Going Away

Regardless of what you think about the drug companies, they are not going anywhere. The pharmaceutical lobby has made certain that it has a seat at the table and it seems probable that any new laws will benefit them. Even though some concessions will be made, the Obama Administration has quietly signaled a willingness not to pursue the most beneficial cost-saving strategies.

Furthermore, the White House is playing ball when it comes to patent expiration, a huge victory for drug and biotech companies. Incidentally, this is partially why I have Healthcare SPDR (XLV) in Zacks ETF Trader.

Potential winners not only include large drug companies like Bristol-Myers Squibb (BMY), but also biotechs such as Amgen (AMGN) and Genzyme (GENZ).

Insurance Companies Will Survive

Despite talk about a public option, the insurance companies are not going quietly into the night. Not only do these companies have a large number of lobbyists, they are also major employers. This makes dismantling the current system very unrealistic and extremely expensive.

Even if the insurers are forced to make big concessions, they could potentially gain millions in new members. Plus, any reduction in medical costs should ultimately help their bottom lines.

Potential winners include Aetna (AET) and UnitedHealth (UNH).

Medical Records and Billing Need to Be Changed

The Obama Administration wants to digitalize medical records. Though having a high initial cost, the benefits are enormous.

Any reform should also directly address medical billing practices. The current system is a network of severely bloated bureaucracies. As a result, doctors have to employ additional staff just to contend with the insurance companies.

Similarly, patients have no idea how to assess what procedures will actually cost them. Not to mention that billing errors are common, partially because of the large number of codes and partially because an insurance's decision as to whether or not cover a procedure is dependent on how well the attending physician explains the reason for the treatment.

Potential winners include Microsoft (MSFT) and Google (GOOG). It also seems logical that other tech conglomerates, such as Hewlett-Packard (HPQ) and IBM (IBM) would be quick to jump into this very large market.

Costs Need to Be Contained

The current health care system is not sustainable. If nothing is done, spending on health care will quickly jump to 25% of GDP. Tort reform is not the answer either, since according to the nonpartisan CBO, malpractice costs account for a very small percentage of overall spending.

A free market system of high deductibles and price conscious consumers is not a viable solution either. As stated above, costs are not transparent. Consumers lack adequate information to quantitatively assess the quality of care.

Finally, there is the problem that many Americans with health care currently are not seeking adequate treatment. We see this in the large number of people with treatable but undiagnosed medical conditions such as diabetes and thyroid disease. If consumers put off regular examinations and treatments in an effort to preserve their health savings account, the potential costs could skyrocket even more in the future.

Any reform needs to reduce the spending on health care as a proportion of GDP. According to the CBO, the legislation considered by congressional Democrats prior to the summer break failed to provide adequate savings, a big problem. If we fail to cut costs, the federal deficit will be balloon and interest rates will soar.

So what is the solution? One idea is a hybrid system that breaks the relationship of getting insurance through one's employer. The Healthy Americans Act does just that. It is a bipartisan bill that has certified by the CBO as paying for itself, and it provides universal coverage. I'm not saying it's the best piece of legislation, but it is a good place to reframe the debate about what should be done.

Potential winners include the U.S. economy.

Americans Need to Make Changes

Finally, any true cost savings will require sacrifices on the part of you and me. Bluntly put, we need to exercise more, eat more vegetables and less meat, drink less soda and floss every single day. Changes to the tax code could easily help push Americans in the right direction. A sin tax on soda and snacks would be a good start.

The government could also help by making weight loss programs tax deductible to anyone whose BMI exceeds a specified level (the deduction is only currently available to those are medically required to lose weight). Additionally, gym memberships and gym equipment should also be tax deductible. Would there be some abuse? Sure, but the overall benefits would still be substantial.

Potential winners would include Weight Watchers (WTW), Lifetime Fitness (LTM) and Nike (NKE).

Comments

[Michael D.:]

Consider CGI Inc. (GIB) as they have products and applications providing digital records management at the state and regional health system level.

Aug 23 09:21 AM

[drbob:]

"Tort reform is not the answer either, since according to the nonpartisan CBO, malpractice costs account for a very small percentage of overall spending."

Just go to any ER and you can see the effect of malpractice fears. Our ER's have become CT Triage areas, primarily to avoid malpractice issues and also for expediency. Likewise, doctors order a variety of studies to ensure they do not get sued.

Direct malpractice costs (litigation, judgements, malpractice insurance) are just the tip of the iceberg compared to indirect malpractice costs, most of which includes unnecessary diagnostic testing.

PS: Don't expect the hospitals and diagnostic facilities to complain about all the money being made 'avoiding malpractice'.

Aug 24 09:06 AM

[macsmart:]

Seems to me that tort reform along with many other things play a role. The problem is multi-faceted and needs a multi-faceted approach.

Aug 24 09:35 AM

[User 476107:]

Are you kidding! I assume when you say "malpractice costs" account for a small percentage of "overall spending" you are talking about liability insurance. Liability insurance premiums average $70k per physician each year. $70k out of an individual physician's pocket may be small in comparison to the entire healthcare spend but you are not comparing apples to apples. I do agree tort reform is a separate issue. Tort reform would help end frivilous law suits and is the moral thing to do. There is a reason why attorneys are generally considered in a bad light.


On Aug 24 09:06 AM drbob wrote:

> "Tort reform is not the answer either, since according to the nonpartisan
> CBO, malpractice costs account for a very small percentage of overall
> spending."
>
> Just go to any ER and you can see the effect of malpractice fears.
> Our ER's have become CT Triage areas, primarily to avoid malpractice
> issues and also for expediency. Likewise, doctors order a variety
> of studies to ensure they do not get sued.
>
> Direct malpractice costs (litigation, judgements, malpractice insurance)
> are just the tip of the iceberg compared to indirect malpractice
> costs, most of which includes unnecessary diagnostic testing.
>
> PS: Don't expect the hospitals and diagnostic facilities to complain
> about all the money being made 'avoiding malpractice'.

Aug 24 11:26 AM

[drbob:]

On Aug 24 11:26 AM User 476107 wrote:

> Are you kidding!

No, I am not kidding.

>Tort reform would help end frivilous law suits
>and is the moral thing to do. There is a reason
>why attorneys are generally considered in a bad light.

Frivolous lawsuits are not really the problem. The problem is that physicians do not want to be involved in a lawsuit and thus order unnecessary testing to avoid any chance of legal action.

Tort reform is not a separate issue from health care reform. Costs for diagnostic testing will continue to skyrocket until this issue is addressed.

Aug 24 12:59 PM

[TinyTim:]

"Frivolous lawsuits are not really the problem. The problem is that physicians do not want to be involved in a lawsuit and thus order unnecessary testing to avoid any chance of legal action."

The testing would be ordered with or without tort reform. See:
www.newyorker.com/repo...

Aug 24 03:08 PM

[drbob:]

The New Yorker article points out another aspect of why costs are high in certain areas of the country.

Health care is a complex animal and high costs are related to multiple issues, tort reform and physician incentives being two big ones.

Aug 24 04:19 PM