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Mr. Phan is an independent trader for Equity Guidance LLC. In his previous life, Mr. Phan spent over 15 years consulting for some of the biggest brokerage and financial institutions on Wall Street. He launched EGS to assist individual investors/traders in their research. He uses various... More
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  • The Healthcare Act & Its Investment Implications 0 comments
    Jul 25, 2012 11:33 AM

    June 28th, 2012 the Supreme Court decided to uphold the Affordable Care Act that was approved by Congress March 2010. Additionally, the Court also stated that the federal government can not penalize state(s) that decide to opt-out of the Medicaid expansion.

    This is a multi part series. Part 1 (this article) summarizes the Affordable Care Act and its wide ranging effects on the healthcare industry. Hospitals, health insurers, drug-makers, physicians and technology companies will be affected. Subsequent articles will examine in detail each affected industry and individual related companies. (Click here to see the affected industries and selected stocks).

    One of the Affordable Care Act's most sweeping changes is to require most individuals to obtain health insurance or pay a tax penalty if they do not obtain coverage for themselves and dependents starting in 2014. Coverage can be obtained through their employer, the Insurance Exchange, or private insurance market outside of the Exchange or government programs such as Medicare, Medicaid. The Affordable Care Act also provides subsidies to low-income individuals and their families in the form of tax credits and reduced costs for coverage purchased through the Exchange.

    Here are the key points of the Affordable Care Act (click here for additional details from the Government Healthcare site):

    1. Up to 33 million additional Americans are projected to secure insurance coverage by 2021 (assuming all states participate in the Medicaid expansion).
    2. Penalties will be assessed for not buying insurance by 2014; Starting at $95 or 1% of annual income and rising to $695 and 2.5% by 2016.
    3. Insurance companies, those that focused on the wholesale market of employer-sponsored coverage, will have to devote a considerable amount of resources to individual policies sold on the exchanges.
    4. Government through the Department of Health and Human Services (NYSE:HHS) dictates premium increases by the insurance companies via the Medical Loss Ratio (NYSE:MLR).
    5. Physician services are already constrained. Increased demand for physician services may come from physician extenders, tele-health, retail clinics, and Federally Qualified health Centers.
    a. Some primary-care physician may benefit from a temporary increase in the Medicaid rate.
    b. First dollar coverage will be provided for preventive services. This will shift healthcare dollars to areas previously not well funded.
    c. Large physician groups are better equipped to participate in the new reimbursement model.
    6. Long-term care, skilled-nursing facilities, home healthcare and rehab centers may experience a negative effect from the Medicare rate cut.
    7. Focus on EMR (Electronic Medical Record) implementation for reimbursement as dictated by Medicaid. This will shift dollars to technology but also result in a significant new cost to care providers.
    8. Pharmaceutical and Life Sciences industry will experience the least operation disruption from the law.
    9. Branded pharmaceuticals stand to lose over the next decade as a result of discounts in the Medicare Part D, the effect of the doughnut hole, increased Medicaid rebates and industry fees. This will be partially offset by a modest increase in sales from expanded insurance coverage.
    10. Large generic manufacturers stand to gain in sales because of new discounts and rebate provisions.
    11. The 2.3% Medical Device excise tax will mean that smaller medical device firms will be affected most.

    The Affordable Care Act requires all employers with more than 50 employees to offer health benefits to every full-time employee or pay a penalty of $2,000 per worker (less the first 30). It also dictates the employers will have to provide insurance benefits to all employees as well as bear the cost of insuring the children of employees to a later age. The benefits must provide a reasonable level of health coverage. Except for grandfathered plans, employers will no longer be able to offer better benefits to their highly compensated executives than to their hourly employees. Employees can shop around for group health plans on new insurance exchanges as opposed to individual plans.

    Congress created a $19 billion subsidy program in March 2009 (American Recovery and Reinvestment Act) to help physicians and hospitals purchase electronic-health record (EHR) systems. At this juncture, we are only at an initial funding stage of providing EHR.

    a. EHR systems program is overseen by Centers Medicare and Medicaid Services (NYSE:CMS) and Office of the National Coordinator for Health Information Technology (ONC) under the U.S. Department of Health and Human Services umbrella.
    b. Recipients of the subsidy must meet the criteria of "meaningful users" by purchasing a "certified" EHR and facilitate adoption of Health Information Technology.

    In summary, the Affordable Care Act will have a wide ranging effect on the healthcare sector. This will translate into significant losses for some and gains for others. For a more details views of the affected industries and stocks.

    Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in HCA, CYH over the next 72 hours.

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