Frankly Speaking About Healthcare (The Investment Minefields)

Includes: AET, CI, DVA, EHC, HMA, IHF, UNH
by: Michael Chandler

For years now, we have been hammering banks about transparency in their financial reporting. When compared to the healthcare industry, however, the banks look relatively transparent - almost crystal clear. It's time to address the hard questions about healthcare and its affordability. The changes in healthcare are coming and from an investment standpoint we need to be fully aware of these changes so that we can navigate some of the choppy waters ahead.

According to census data from 2011, the average yearly income for a family of four was just over $50,000 - down 1.5% from the previous census. According to CNNMONEY (3/29/2012), "The cost to cover the typical family of 4 under an employer plan is expected to top $20,000 on healthcare this year."

So, if I have this right, a family of four with an annual pretax income of $50,000 will have a healthcare cost (most of which comes from company plans) of $20,000. Are you kidding me? In just this past year alone, healthcare costs have increased 7%, despite falling incomes. Healthcare costs have been increasing like this for a number of years. This situation will worsen for many individuals who are compelled to buy their own health insurance and thus foot the entire bill. And they say that the new Health Care Act individual plans will be even more expensive, going forward.

Many large companies have been given exemptions on the mandate to offer healthcare to their employees. Companies with fewer than 50 employees are exempt. Many companies are limiting their hiring to part-time employees in order to limit their healthcare benefit costs. Escalating healthcare costs are forcing corporations to cut benefits, force higher deductibles, and require employees to pay a larger percentage of the premiums.

Starting in 2014 everyone will be forced to have healthcare insurance or pay a penalty (excuse me, according to the Supreme Court, it's actually a tax). It seems to me the trend going forward is going to be a significant number of individuals purchasing individual plans as the Patient Protection and Affordable Care Act is enforced. Keep in mind that preexisting conditions will have to be accepted by all insurance carriers. If a large increase in individual plans comes into play as it now appears insurance companies will individually underwrite these plans and the cost for a policy with pre-existing conditions will naturally increase even more.

To offset the increase in individual plans, the Act calls for exchanges to be set up --- these are expected to function much like a group plan, thus spreading the additional risk over large groups of people. By doing this, the cost of insurance should - theoretically - drop. The State Governments had until December 14, 2012, to decide to establish their own exchanges. Half of the States, however, have declined to participate. This will force the federal government to take on this very expensive undertaking themselves. Only 18 states have decided to do this on their own, and 7 have decided to team up with the federal government to handle their exchange.

With all the new laws regarding healthcare taking effect, it makes perfect sense to me why healthcare premiums continue to rise. You cannot keep your children on your policies through age 26 and force the insurance industry to accept pre-existing conditions ... without having the cost of insurance rise. We are told by the Washington intelligentsia that our costs will go down.

If costs are to go down, the exchanges must be put in place nationally. The States have spoken on this issue, and individually they will not participate. If you take a close look at Medicare today they basically fix prices that the medical practitioners are being paid now. Sounds like when all said and done, we will have another Medicare program for everyone.

To better illustrate my point, let me share a practice now being followed by a good many medical practitioners --- a practice that will demonstrate, from a business perspective, just how confusing and deceptive the entire healthcare industry has become.

Just last week I needed to have an MRI done. I showed up at the appropriate time and was informed that the bill for the procedure was about $1,800.00. Not play money, but nonetheless, not unreasonable. I explained that I would be paying out of my own pocket. At once the receptionist told me that by paying cash I would get the Medicare rate for the same procedure, which was $490.00. I paid my bill, went back to my office, and placed a few select telephone calls ... only to find out that this was standard operating procedure.

From a businessman's perspective, I'd like someone to tell me how you discount an $1800.00 bill down to $490.00, and what kind of margins we are apparently dealing with. These pricing discrepancies should send up some sort of red flag to every American who will be forced into nationalized medicine.

From an investment standpoint, I would think this Affordable Care Act will place downward pressure on the margins of most, if not all, medical providers in this country. This would include Family Medicine, diagnostics, labs and other specialty medical providers, and naturally, hospitals.

On the other hand, certain insurance carriers should do quite well, particularly the HMO's. Some of the companies I believe will do well in the long term are large insurance companies that will play a role not only insuring but also administering the government plans. These would be Cigna (NYSE:CI), Aetna (NYSE:AET) and United Healthcare (NYSE:UNH). I would stay away from most of the providers like DaVita (NYSE:DVA), Healthsouth (HLS), I Shares DJ Healthcare Provider index (NYSEARCA:IHF) and even Health Management Associates (NYSE:HMA) just to name a few.

Right now the Federal Government is targeting Medicare and Medicaid fraud as well as eliminating unnecessary testing ordered by physicians nationwide. They must clean up this monster bureaucracy before they transition to this even greater "monster" government program. Hopefully, transparency will prevail, so that patients can have a clear understanding of the cost of their medical dollars. After all, for a family of four, $20,000 is not chump change, considering it's 40% of their pretax income. For the investor beware of the headwinds coming and stand clear of those industries most likely to be effected by these changes, particularly the healthcare providers whose margins are most likely to be squeezed.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.