In The Alpha Hunter, I explain that the most important thing to do during times of government intervention is to identify the unintended consequences. Unfortunately, big government has never been able to live up to its idealistic agenda. This health care reform will be no different. Now that we’ve had a chance to digest the bill, we’re ready to declare the winners and the losers:
1-Health Insurance Companies. The recession created quite a dilemma for insurance companies. As consumers dropped their coverage the premiums were set to skyrocket among the remaining pool. Insurance companies were being forced to raise premiums by as much as 40% later this year because of the profit squeeze. That all changes now. With a government mandate to increase the pool by 32 million people, insurance companies like Wellpoint (WLP) and United Health (UNH) will benefit.
2-Hospitals. Hospital occupancy will max out when we add 32 million people into the system. Hospitals will be expanding. Hospitals will see huge revenue increases. This is where the unintended consequence of government inefficiency will really manifest itself. Ideally, the government will try to squeeze profit margins of the hospitals but will this really happen? Will costs really get cut? If history is a reliable guide, costs will actually go up in the absence of a competitive market. Government will not be able to effectively allocate the resources, hospitals will be flooded with patients, and costs will be higher than anticipated for taxpayers. This is good news for Tenet and Lifepoint.
3-Pharmaceuticals. Time to load up on drugmakers. If you thought this country already had a dependence problem, watch out. Doctors will prescribe and insurance will pay. My top pick in this sector is Teva (TEVA) because the government will do all they can to push the generic brands. Citi just upgraded Teva with a $72 price target. I agree.
4-Lawyers. The uninsured have high expectations as they head into the doctors office. The increased volume of patients should have coincided with tort reform but it did not. Lawsuits threaten to destroy any individual company who gets caught on the wrong side which is why I choose to play this sector with a broad based ETF rather than individual stocks.
5-The uninsured. The 32 million people who now have access to health insurance are the big winners. President Obama risked political suicide for himself and for his party to get this reform. My perception is that Obama would have preferred to wait until the economy was further along in its improvement but he had to act now because of the November elections. Helping these 32 million uninsured is his stamp on U.S. history. The question is, can we afford it? Social security is a mess. Medicare and Medicaid are a mess. Can the United States afford another entitlement program? During times of economic prosperity we will be fine but what about the next big recession? The universal healthcare burden potentially could take us out.
1-Doctors. Doctors are now government employees. The unintended consequence is that they will be overworked and underpaid. Fewer people will want to enter the field. Their job description will change. It will include less time with patients and more time supervising nurses and Physician Assistants. I guess I could add nurses and PAs to the list of winners. There will be huge demand for these professionals. Doctors will also be the direct recipients of the lawsuits. Say goodbye to the good old days Doc.
2-Previously insured patients. Get used to lines, lines and more lines. Adding 30 million consumers to a system that was already under pressure is a difficult thing to do. It could work if we simultaneously used stimulus money to increase medical capacity for 30 million new patients but I haven’t heard about that plan, have you? The quality of care will go down and the quantity of care will decrease in frequency as well. If you want an appointment, be prepared to wait a few months.
3-Industrials. Businesses are now forced to provide health insurance or else they will get fined. This is no big deal for companies who are flush with cash and have high profit margins (tech companies) but it is a strain on those who are struggling to compete internationally. We already heard from the CEO of Caterpillar (CAT) voice his opposition to the reform and I expect we will hear more from similar companies who are now at a competitive disadvantage with overseas counterparts who don’t have the same health care requirements.
4-Taxpayers. Obviously the high income bracket will get hit along with investors but it would be naive to think that the burden will remain contained to these groups. Unless costs come down dramatically, which looks unlikely with the government in charge, the burden will eventually be felt by all taxpayers. Look at the cost disaster in Massachusetts if you want a precedent.
5-The unemployed. The incentive to hire new employees just disappeared. Corporations will find loopholes to avoid the medical insurance requirement. We will see a rise in temp workers and contract workers. The day and age of full-time, salaried, employees is coming to an end.
In conclusion, this health care reform is historic and its effects will be felt by all. If you think you might be negatively impacted than you’ll want to own some rising healthcare stocks to balance out the financial burden. My favorite play is the HealthCare Select Sector ETF (XLV) with a small position in Teva Pharmaceutical to boost performance. Both will be added to the economictiming.com portfolio.
Disclosure: Long xlv, teva