U.S. Healthcare Legislation Investment Impact

Saturday night the U.S. House of Representatives brought us one large step closer to a national healthcare system. Investors should be cognizant of the financial effects that would follow.

In the extreme short-run, it would be reasonable to assume that the U.S. stock market would react negatively, although short-term price movements are often chaotic. In the intermediate-term, if the legislation goes forward, the healthcare sector should perform at a lower level than in periods prior to national healthcare.

The chart below shows the historical relative price performance of several healthcare sectors versus the S&P 500. They are: biotech ($DJUSBT), pharmaceuticals ($DJUSPR), healthcare providers ($DJUSHP), medical equipment manufacturers ($DJUSAM) and medical supplies ($DJUSMS). The overall healthcare sector is represented by $DJUSHC.

Biotech and pharmaceuticals have underperformed. We expect that relationship to be accentuated. The other sectors are expected to have lower relative performance than before, particularly the healthcare providers, which include the health insurers.

click image to enlarge

Here are a few of the many specific negative profits factors in national healthcare:

• Drug patent protection will be shortened from 20 (+ up to 5 for approval) years to 12 years (? + up to 5 for approval), before generic competition will be possible. That reduces profitability of new drug research. Profits will be lower and fewer new drugs will be developed. That will reduce valuations on companies that develop new drugs. [In 1995, Congress increased the duration of drug patents from 17 to 20 years to encourage more development, but now in a reversal they cut from 20 to 12 to increase generic competition -- unfortunately at the cost of future medical advances].

• Annual fees to support the national healthcare budget will be assessed on insurers, drug companies, medical device companies, and clinical laboratories. That will reduce valuations of companies in those categories.

• Insurers may or may not be driven out of business (a major uncertainty that will reduce current valuations) and those that survive may effectively be converted to service utilities with regulated rates and profits (likely to reduce valuations below historic levels).

A small sampling of large companies in the healthcare field include:

• Biotech: AMGN, BIIB
• Pharmaceuticals: JNJ, PFE
• Medical Equipment and Supplies: MDT, BDX
• Clinical Labs: DGX
• Insurers: AET, UNH
• Hospitals: CYH, UHS

This list of companies is not a securities recommendation of any kind — just a representative sampling of the sector and its sub-sectors.

Disclosure: We do not own any named security.

Comments

[BlueOkie:]

The House bill surely will have a lot of political fallout come next November. The elections in NJ and Virginia should have been a wake up call. Let's see what the Senate does. Ofcourse, is healthcare more important than the 10.2% unemployment. What about the Cap & Tax. Healthcare is the third rail.

Nov 09 08:30 AM

[Michael D.:]

So worried that investments will fall in value when cash flows and margins are reduced due to the 'commoditization' of healthcare. This is what can be expected, healthcare won't be only available to the priviledged few, but the masses. Bravo to the USA.

From the investing standpoint, there is no mention of the increased volumes of healthcare being delivered if you finally have a population who a)has access to a doctor and a basic plan and b)is not refused from insurers due to 'pre-existing conditions'.

I'm a good socialist, society means you take care of everyone. I'm still long on Healthcare too. 'Everyone' is a bigger pond than 'few'.

Nov 09 11:21 AM

[cyclingscholar:]

Health Care companies as regulated utilities...hmmm...profit margins trimmed to the low teens and PE ratios on those earnings around ten. Do the math!

Nov 09 11:53 AM

[searcher:]

Those enterprises that will profit from any increase in volume in patients and procedures would be the most likely to benefit. Abbott Labs, Covidien, Becton, Dicknson, C.R. Bard, Baxter Int'l etc.. Also, well capitalized generic drug makers. It's an ill wind that blows no one any good.

Nov 09 01:22 PM

[Richard Shaw:]

RECON65:

NO. You are the idiot. As the article said, the BILL brings us "one step closer" to law, and that the law would have certain effects, and that the market might react now and would react if enacted.

Try reading more carefully next time.

Nov 09 01:23 PM

[zagrebzagreb:]

We all due respect, I find it absurd that the author does not account for the vast increase in market that most all device manufacturers, pharma corporations, etc will witness: More people covered, more healthcare coverage, more money spent on the industry...

Currently the budget office is estimating roughly $120 billion a year in added expenditures. That's around $1,000 per household. Any other industry would be jumping for joy, but healthcare is next to the energy industry when it comes to playing nice with government and the public... ANYTHING that restricts freedom is greeted negatively, never mind the necesity of it.

Additionally, if you don't think taxes on devices will simply be past along to the patient / insurer you haven't been paying attention to business in America. Companies will not lower margins; they will not absorb taxes.

Just my opinion, but I work for a device manufacturer and help set pricing and deal with insurance reimbursement issues everyday.

Nov 09 02:45 PM

[Alan Young:]

Let's do it without the name-calling, shall we?

Mr Shaw, you are over-reacting. Health industry lobbyists had more influence on this bill than anyone else, especially Socialists. Insurance companies will prosper from increased enrollments. Michael D. makes an excellent point: more coverage=more business for everyone in the sector.

It would have made sense to craft a bill that would have reduced the costs of the system, which is wildly out of control. But they didn't. The pigs are still at the trough. And we can count on the Senate to throw them more slops.

Nov 09 02:48 PM

[The Geoffster:]

The assumption that spending more of the taxpayer's money will make things better has survived all kinds of evidence that it has made things worse. The black family- which survived slavery, discrimination, poverty, wars and depressions- began to come apart as the federal government moved in with its well-financed programs to "help."”

Thomas Sowel


On Nov 09 11:21 AM Michael D. wrote:

> So worried that investments will fall in value when cash flows and
> margins are reduced due to the 'commoditization' of healthcare.
> This is what can be expected, healthcare won't be only available
> to the priviledged few, but the masses. Bravo to the USA.
>
> From the investing standpoint, there is no mention of the increased
> volumes of healthcare being delivered if you finally have a population
> who a)has access to a doctor and a basic plan and b)is not refused
> from insurers due to 'pre-existing conditions'.
>
> I'm a good socialist, society means you take care of everyone. I'm
> still long on Healthcare too. 'Everyone' is a bigger pond than 'few'.

Nov 09 02:55 PM

[Gedankonomist:]

Yes, just like social security. The definition of "insanity" is essentially the idea that, after trying something and finding out you are wrong, you go and try the same thing again, expecting a different result.

Roosevelt promised you "social security" and what you got instead was a Ponzi scheme. Actually, it is worse than a Ponzi scheme, since most Ponzi schemes are VOLUNTARY. So my apologies to Charles Ponzi.

Anyway, now the same monstrosity in DC is promising you "free health care." You fools, you are about to find out the hard way that "free health care" is actually stealing. Although you think your neighbor will be paying for your "free health care," you will be getting robbed at the same time.

On Nov 09 11:21 AM Michael D. wrote:

healthcare won't be only available
> to the priviledged few, but the masses.

You doofus.

Nov 09 02:59 PM

[Chancer:]

You claim spending of $1000 per household. But liberal Democrats have to give subsidies, because households lack $1000 to spend. They have to get the money from OPs (other people) after passing through the hands of the middleman (government) to skim off their bureaucracy cost.

It is a fact (by polls) that those who can afford healthcare, but do not want to spend "their own money" for it, are willing to spend only $100 to $200 per month (unrealistic).


On Nov 09 02:45 PM zagrebzagreb wrote:

> We all due respect, I find it absurd that the author does not account
> for the vast increase in market that most all device manufacturers,
> pharma corporations, etc will witness: More people covered, more
> healthcare coverage, more money spent on the industry...
>
> Currently the budget office is estimating roughly $120 billion a
> year in added expenditures. That's around $1,000 per household. Any
> other industry would be jumping for joy, but healthcare is next to
> the energy industry when it comes to playing nice with government
> and the public... ANYTHING that restricts freedom is greeted negatively,
> never mind the necesity of it.
>
> Additionally, if you don't think taxes on devices will simply be
> past along to the patient / insurer you haven't been paying attention
> to business in America. Companies will not lower margins; they will
> not absorb taxes.
>
> Just my opinion, but I work for a device manufacturer and help set
> pricing and deal with insurance reimbursement issues everyday.

Nov 09 03:31 PM

[dw57:]

while one might complain that SS is a ponzi. the replacements for pensions are more like frauds that any thing else


On Nov 09 02:59 PM Gedankonomist wrote:

>
> Yes, just like social security. The definition of "insanity" is
> essentially the idea that, after trying something and finding out
> you are wrong, you go and try the same thing again, expecting a different
> result.
>
> Roosevelt promised you "social security" and what you got instead
> was a Ponzi scheme. Actually, it is worse than a Ponzi scheme, since
> most Ponzi schemes are VOLUNTARY. So my apologies to Charles Ponzi.
>
>
> Anyway, now the same monstrosity in DC is promising you "free health
> care." You fools, you are about to find out the hard way that "free
> health care" is actually stealing. Although you think your neighbor
> will be paying for your "free health care," you will be getting robbed
> at the same time.
>
> On Nov 09 11:21 AM Michael D. wrote:
>
> healthcare won't be only available

Nov 09 06:49 PM

[robert.b.fe...:]

Greetings. We have never referred to ourselves as "The masses." and would rather not start now.


On Nov 09 11:21 AM Michael D. wrote:

> So worried that investments will fall in value when cash flows and
> margins are reduced due to the 'commoditization' of healthcare. This
> is what can be expected, healthcare won't be only available to the
> priviledged few, but the masses. Bravo to the USA.
>
> From the investing standpoint, there is no mention of the increased
> volumes of healthcare being delivered if you finally have a population
> who a)has access to a doctor and a basic plan and b)is not refused
> from insurers due to 'pre-existing conditions'.
>
> I'm a good socialist, society means you take care of everyone. I'm
> still long on Healthcare too. 'Everyone' is a bigger pond than 'few'.

Nov 10 09:23 AM

[robert.b.fe...:]

Pages 91-93 section 202 in it's entirety will produce a single payer 100% U.S. Government run health care system in ten years. Doctor compensation and drug pricing will be "Negotiated." by government run exchanges starting in 2013. Oh wait I forgot the government doesn't negotiate it dictates terms. Just ask the doctors accepting Medicaid/Medicare how well that works. As I have posted here before the sole beneficiaries of this are the trial lawyers. Just think of all the constitutional issues to be argued. However once everything is said and done this will end badly for them as well. Once the single payer system is achieved the government will exempt itself from legal action much as school districts do now.

Nov 10 10:02 AM

[demlord:]

good socialist =good facist.... bigger pond,who pays? please pay , i mean invest in your fantasy... may reich-king obamahitler save us...


On Nov 09 11:21 AM Michael D. wrote:

> So worried that investments will fall in value when cash flows and
> margins are reduced due to the 'commoditization' of healthcare. This
> is what can be expected, healthcare won't be only available to the
> priviledged few, but the masses. Bravo to the USA.
>
> From the investing standpoint, there is no mention of the increased
> volumes of healthcare being delivered if you finally have a population
> who a)has access to a doctor and a basic plan and b)is not refused
> from insurers due to 'pre-existing conditions'.
>
> I'm a good socialist, society means you take care of everyone. I'm
> still long on Healthcare too. 'Everyone' is a bigger pond than 'few'.

Nov 10 05:35 PM

[robert.b.fe...:]

For all of you "Good socialists." out there please keep in mind that a government powerfull enough to give you what ever you want is fully capable of confiscating every thing you have. To pararhrase Ben Franklin: Those who are willing to sacrifice their liberty for a measure of security will have neither.

Nov 10 05:47 PM

[ncalmd:]

In the interest of "full disclosure", I am a primary care physician who still practices solo, and have been practicing for 28 years. While we likely see some increase in medications for hypertension, diabetes and cholesterol, it will not be all that substantial, and other than the diabetic meds, the increase in the other drugs are going to be generic. There are now a number of very good generics for treatment of high blood pressure and elevated cholesterol. However, there is only one generic medication for diabetes that works in a favorable manner for diabetes, but there are a growing number of new medications for diabetes that will treat the disease in a favorable manner.

The reason I believe the numbers will be far less than people believe, is that in this country, if have significant chronic medical problems, if you aren't insured before you start treating these, you will be very soon after diagnosis. If you are very well off, just the cost of hospitalization bankrupt you, and if your problems are severe, you will probably end up quitting work to be eligible for Medi-caid. I am not suggesting that there isn't something wrong a system that functions this way, I am simply trying to point out that the individuals who consume a significant amount of medical resources all have insurance private or public. While I believe the following is accurate or close to accurate, I'm pulling the following from memory, so it could be off by some... but the figures I remember in the last article I read was the unhealthiest 3% of the people account for 50% of the healthcare spending, and the healthiest 50% account for 5% of the healthcare spending.

Nov 11 03:24 AM

[ncalmd:]

While I haven't read the bill, if as the author points out, the duration of the drug patents is shortened decreasing the number of new medications brought to market, this would be the worst of any number of measures that will end up making health care more, rather than less expensive. (Also in the interest in full disclosure, I strongly favor a national system, and if I had my preference it would be the Dutch)

While there are some really great gadgets like pacemakers, and neat procedures like endoscopic surgeries, the importance of these pales in comparison to the capabilities of the medications introduced in the past 20 years. The last thing we should do is slow down the R&D on meds.

Nov 11 03:35 AM

[PtsB4Profits:]

with companies like Community Health Systems (NYSE: CYH) in charge of the delivery of healthcare services, no restructuring of the insurance system will solve the health care crisis in this country. Check out this website to learn more patientsbeforeprofits.org

Nov 12 11:56 AM

[ncalmd:]

I looked at website, and it didn't provide any financial details. Do know what the return on investment is for this facility? The reason I ask is that a hospital in the community where I live has its third owner in 6 years, and it appears that finally, this latest group may survive financially. What I can tell from the article is that CHS only paid $73 million for the facility which means the facility is either very small or in a very unfavorable economic environment. In either case, it would take some very skilled administrators to turn a profit, and if the corporation is not making a profit, they have an obligation to their shareholders to sell out and deploy their resources where their shareholders will realize a better return. While I am strongly in favor of national health insurance, at present we have a for profit system. While I think its reasonable to weigh excessive profits against patient and community needs, it serves no point to say patients before profits. No profits... no facilities.

On Nov 12 11:56 AM PtsB4Profits wrote:

> with companies like Community Health Systems (NYSE: seekingalpha.com/symbo...)
> in charge of the delivery of healthcare services, no restructuring
> of the insurance system will solve the health care crisis in this
> country. Check out this website to learn more www.patientsbeforeprof...

Nov 12 09:21 PM

[behiggins:]

All this bickering makes me sick. Profits before patients! Patients before profits! Many other countries have found that some form of national health care works. Why can't we benefit from their experience and develop something that's even better?

Sure, those companies that can't compete successfully would be in trouble if our health care system is ever reformed. However, they have had decades to prepare for this day. The better-run companies will still prove to be good investments in the long run. Rather than fighting socioeconomic progress, businesses and investors should be supporting this entire effort.

We Americans typically think of ourselves as No. 1 in everything that's good. However, when it comes to health care, the World Health Organization reports that the U.S. ranks much lower than many other countries that spend far less on health care than the U.S., as a percent of GDP. (For example, see www.photius.com/rankin....)

We're obviously not getting our money's worth. If health care reform legislation ever passes, it will probably end up being very beneficial for many businesses and most Americans. If so, then maybe the U.S. can show the world that we're truly No. 1 in just about everything good.

Dec 06 04:34 AM