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The Winners and Losers from a New U.S. Healthcare Reform Bill

|Includes:ATHN, CERN, HUM, MCK, Merck & Co Inc. (MRK), PFE, UNH

 According to a Thomson Reuters poll, 59.9% of Americans would like to see a public option in any healthcare reform bill, versus just 40% who don’t.

If this were an election, it would be a landslide victory.

But despite the fact that Main Street actually wants it, the Senate killed the public option in its version of a healthcare reform bill.

Business as usual in Washington.

But regardless of the current bruhaha in Congress, or the pundits blowing enough hot air to affect the global climate, healthcare reform is most likely coming.

Whether or not it will eventually contain a public option remains to be seen. However, Wall Street will likely react negatively to any changes to the system, and healthcare companies and investors alike are concerned that reform will hurt many firms in the sector.

Well, I’m here to tell you to have no fear. In many cases, higher sales volumes will offset the cuts in prices that healthcare providers can charge. After all, having more people insured means more consumers popping pills, staying in hospitals, having procedures, etc.

Let’s take a look at how various groups within the healthcare industry could fare in 2010…

The Winners of Healthcare Reform

  • Big Pharma: Cozying Up to the White House

The Pharmaceutical Research and Manufacturers of America, the trade group that represents drug giants like Pfizer (NYSE: PFE) and Merck (NYSE: MRK) wasted little time in reaching an agreement with the White House on healthcare reform.

In consideration for Big Pharma firms lowering drug costs by $80 billion over 10 years, the government has agreed not to impose price controls on the pharmaceutical industry and to keep cheaper foreign drugs outside U.S. borders.

However, some senators are now trying to back out of the agreement and find a way for less expensive imports to cross the border. This could get ugly between lawmakers and the drug companies, but I expect the original deal (or one close to it) to be what both sides agree upon.

So what Big Pharma loses in price cuts should be more than offset by newly covered patients who will now be buying prescription drugs. The mamas of drug company executives and their lobbyists didn’t raise no dummies. It looks like they’ve made a sweetheart deal in what could have been a difficult situation.

If this reform goes through, drug companies will still earn profits. Their only obstacle to growth will be innovation, not Uncle Sam.

  • Biotech: Finding Cures and Creating Jobs, Biotech’s Future Looks Bright

One sector that should hold fairly steady throughout the reform ordeal is biotech.

I believe President Obama is sophisticated enough to understand that it typically takes nearly $1 billion and eight to ten years to develop a successful biotech drug. And I don’t think he’s about to remove the financial incentives that biotech investors need to help start these companies.

Not only that, biotech could be one of the primary drivers of job growth in the United States. In addition to research and development, many biotech drugs are still produced in the United States in order to keep a tight control on quality and to appease regulators.

While we could see pressure on some of the most well-known biotech drugs, such as Genentech’s cancer drug, Avastin, which can cost $100,000 per year, I believe most biotech companies will emerge from any new legislation in pretty decent shape. And small-cap biotechs that don’t even have a product on the market yet shouldn’t be affected at all by reform.

  • Technology: The Medical “Digital Age” Should Bode Well for These Three Stocks

Another area in which the government is dishing out decent incentives is in medical record-keeping.

The healthcare sector is badly in need of a move towards a more modern, digital age that includes electronic medical records, and this is a trend that will likely continue, whether or not Washington kicks in a few bucks to keep it going.

Electronic medical records should reduce the number of hospital and doctor errors by ensuring that a patient’s information is readable and in one central location.

There are several companies poised to take advantage of this trend: Athenahealth (Nasdaq:ATHN) is one of the fastest-growing firms. Others in the space include McKesson (NYSE:MCK) and Cerner (Nasdaq: CERN).

The Losers of Healthcare Reform

  • Hospitals and Hospices: Spending Cuts to Hit Revenues

An area where the government may be able to cut spending is in reimbursement to hospitals, hospices and nursing homes. The current bill proposes slashing $150 billion in reimbursements to those types of institutions.

While hospitals could take the biggest hit, they’ll also benefit from fewer indigent patients racking up huge expenses in emergency rooms, only to be charged off. And with a greater number of people covered by insurance, hospitals will see more of those types of charges reimbursed.

It’s too early to say how reform will impact hospitals. I suspect it will still be negative, but not devastatingly so. On the other hand, hospices and nursing homes could suffer more, as it will be difficult for them to make up for the lost revenue.

~ Insurance: Scrambling to Fight Change

I’ve never been a fan of health insurers. It doesn’t make sense to me to invest in a company whose profit motive is to deny customers access to its services, thereby angering those customers.

The area is even less appealing now and insurers are clearly worried about reform, as evidenced by UnitedHealth Group’s (NYSE: UNH) urging its employees to write to their senators to lobby against reform.

In fact, UnitedHealth Group has spent $3.5 million on lobbying efforts and through September, the insurance industry spent over $120 million lobbying Washington. Clearly, they don’t want reform and are spending huge sums of money to fight it.

Those that participate in Medicare Advantage could be affected even worse. That’s because a healthcare overhaul will likely cut Medicare spending, particularly in Medicare Advantage, which provides benefits such as lower co-payments and gym memberships to 11 million seniors.

Companies like Humana (NYSE: HUM) and UnitedHealth Group that offer Advantage plans could see their profits decline significantly. According to Goldman Sachs, Humana derives two-thirds of its earnings from Medicare Advantage while UnitedHealth Group gets roughly one-third of its profits from the program.

Additionally, private insurers could face competition from a public plan, or be forced to take on higher-cost patients with pre-existing conditions. This is one group that I don’t expect to fare well in a reform bill.

Profit from Healthcare Reform Misconceptions

One thing seems certain: If healthcare reform gets passed, many within the healthcare sector will be bent out of shape. The ensuing scare tactics will likely lead to a selloff in healthcare stocks, since most investors simply think reform means lower revenue.

But as you can see, many companies will be just fine. Others will even gain more customers than they’ve ever had. There are many misconceptions out there at the moment, but you can use this to your advantage by buying quality healthcare and biotech stocks that will continue to grow, no matter what bill Washington eventually spits out.

Healthcare’s Biggest Week of the Year

Next year is going to be a very interesting one for healthcare companies – and despite the political chaos, I expect there to be many winners.

Each year, the industry wastes little time setting the stage for the following 12 months, with the massive JP Morgan Healthcare Conference taking place in San Francisco in January.

This is by far the most important healthcare investor conference of the year and I’ll once again be making my annual pilgrimage to the event. Over the years, it’s become an increasingly exclusive conference and even being a portfolio manager doing business with JP Morgan doesn’t guarantee you entry into it.

Over 300 companies will make presentations, while several hundred others who didn’t get invites will descend on the city to meet with the investors who are in town.

For me, it means a jam-packed schedule, as I meet with company executives, industry insiders and hedge fund managers. I’m already working on several good ideas for 2010, but I expect to come away from the conference with many more.

I’ll send updates from the conference and as always, I’ll be here to reveal the healthcare stocks with the greatest potential for gains in 2010.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld

Disclosure: No Positions