Health Care Stocks: In For a Long Year?

Posted by: Ben Steverman on July 2, 2009

Health care stocks are among the riskiest games investors can play these days. The reason, of course, is the health care reform effort, spearheaded by President Barack Obama and winding its way through Congress.

What makes this confusing is that reform could significantly help or hurt particular industries within health care — depending on how the law is written.

BusinessWeek’s Aaron Pressman discussed the debate over hospital stocks in this video.

Stifel Nicolaus (SF) recently issued a 63-page report analyzing the possible effect of health care reform on various health care stocks. A few of the key conclusions:

First, the bullish case for health care stocks is easy to understand: Health care reform could boost overall health care spending by bringing 48-million uninsured people onto insurance rolls. Stifel cites the Commonwealth Fund, which estimates a 16% increase in the insured could result in an extra $122 billion in spending each year.

But, second, Stifel analysts question this thesis, seeing an increased risk to firms’ profits from health care reform. The political tone has changed because of worries about mounting deficits, “suggest[ing] that more aggressive cost cutting and increased regulation may result.” That’s a change from May, when health care stocks actually outperformed the market on better-than-expected earnings and hopes of positive effects from reform.

Finally, Stifel’s experts warn this debate could take a long time:

Health reform legislation is likely to take most of 2009 to finalize and will continue to be a headline risk for most healthcare sectors throughout the process.

Some health care industries are less exposed to the debate — “medical and drug distributors, generic pharmaceuticals and possibly large-cap pharmaceutical and biotechnology companies.” But for most of the health care sector — and for its investors — this could be a long, volatile year.

Reader Comments

hsr0601

July 2, 2009 8:50 PM

The independently-funded healthcare policy research organization, The Commonwealth Fund, compared possible savings 'a health insurance exchange' could bring under three different scenarios. One would include a Medicare-like plan along with private insurance. Another would instead offer only a government-run plan with rates somewhat higher than Medicare. The final one would be private insurance with no government plan at all.
Commonwealth's study found cumulative health system savings between 2010 and 2020, compared with projected trends for that period, would range from $3.0 trillion under a Medicare-like plan along with private insurance paying providers at Medicare rates in competition with private plans, to $2.0 trillion for a public plan paying providers at rates between Medicare and private plan rates, to $1.2 trillion in the private plan-only scenario. All three options would help insure nearly all Americans, it said, with the number of uninsured dropping to about 4 million people by 2012. 'Such an exchange' would offer a central point for consumers to shop for and compare health plans.

Under the Medicare-like plan along with private insurance, all U.S. residents would be required to obtain health coverage. The plan would establish a new government-sponsored health program for people younger than age 65 who are not eligible for Medicare. More than 40 million people would be expected to enroll in the program, according to Cathy Schoen of the Commonwealth Fund.

The government-operated insurance exchange would be similar to an existing program in Massachusetts and would allow people to compare coverage offered by private insurers and the new public program. In addition, the plan supports wide adoption of health information technology, better disease prevention efforts and 'changes to the insurance payment system' that promote efficiency. Health spending would continue to increase under the plan, but at a slower rate than current projections over the next 10 years. The Commonwealth Fund said the plan would reduce annual health care spending growth from a projected 6.7% to 5.5% and save a cumulative total of about '$3 trillion' by 2020, adding a national health insurance exchange program that includes a federally managed health insurance option could potentially save $1.8 trillion more than a plan consisting only of private plans.
The group's analysis assumed other changes would also be made to the U.S. healthcare market. These include an expansion of existing government coverage and new regulations that would require insurers to cover a wider range of consumers. Hospitals and doctors would also see their revenues grow with any of the three exchanges but at a slower rate, the report said.

The proposal's advocates have argued that a government-sponsored insurance plan would offer the 46 million uninsured Americans an affordable alternative to costly private insurance, adding that It would provide a strong incentive for private plans to strealine, innovate and compete.

Thank You !

jeremyeast

July 6, 2009 12:30 AM

east coast health insurance is my company in Florida at http://www.echealthinsurance.com and we are supporting total health insurance reform even in spite of the fact that we will lose out entire business model. I am only unafraid because I can apply the same model to property and casualty or life etc. But as someone who sees the amount of seemingly illegal tactics and their effect on everyday americans I continually fight the urge to vomit. Blue Cross has a monopoly in our state due to it's cozy relationship to the state and is basically tax exempt, yet their rates and underwriting would indicate the opposite.

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About

Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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