Universal Coverage: Stocks That Would Win

Initiatives to extend health insurance could especially benefit health-care facilities. S&P's top pick: Psychiatric Solutions

by Jeffrey Englander, CFA From Standard & Poor's Equity Research

As the number of uninsured Americans has continued to increase, accompanied by the continuing rise of health-care costs, the significant financial burden of caring for the uninsured has become a matter of increasing public policy debate. The latest point of contention: President Bush's veto on Oct. 3 of legislation to boost funding for a children's health insurance program.

Health-care reform has occupied the attention of policymakers at the national level for at least a decade. However, the gradual but continued increase in both the absolute number of the uninsured and their share of the total U.S. population has added to the financial burden on states, which fund a portion of Medicaid. This has led a number of states to propose or enact dramatic reforms to state-funded health-care plans, with a goal of universal coverage.

Standard & Poor's Equity Research believes health-care facilities companies would be direct beneficiaries of any move toward universal coverage at the state or (especially) the federal level. Any type of plan that extends coverage to the previously uninsured would help lessen or eliminate the instances of bad debt and charity care now delivered to the uninsured or underinsured.

Universal Coverage Stems Cost Shifting

We think that the implementation of universal coverage plans would have positive potential implications for the stocks of Psychiatric Solutions (PSYS; $40), which carries a strong buy recommendation from S&P; Community Health Systems (CYH; $32), Universal Health Services (UHS; $53), each of which is ranked hold; and Health Management Associates (HMA; $7), ranked sell.

In addition to providing care for the previously uninsured, universal coverage would affect facilities companies indirectly by improving the affordability and maintaining the benefits of existing plans as unreimbursed care leads to increases in other private insurance premiums, known as "cost shifting." According to a report by Families USA, a nonprofit health-care advocacy organization, cost shifting accounted for 8.4% of the average increase in health insurance premium payments in 2005 and is expected to account for 8.7% of the average increase in health insurance premiums by 2010.

One result of such cost shifting is less affordable private insurance: Providers reduce benefit packages, and employers propose higher cost-sharing for those that are covered to reduce the costs of the plans. The costs of services no longer covered or paid for by higher patient co-payments and deductibles are often responsible, at least in part, for increases in bad debt expenses, as even individuals with insurance cannot afford to or do not pay the full amount of billed services.

Unlike a number of past attempts at health insurance reform, the majority of universal coverage plans seek to avoid wholesale overhaul of the current health insurance system. Instead, they seek to broaden coverage of existing private commercial health plans to the uninsured or underinsured via subsidies, while mandating that individuals purchase insurance coverage.

States Lead on Reform

As of September, 2007, eight states and the cities of New York and San Francisco have either enacted or are proposing to enact some form of health-care coverage reform. In April, 2006, Massachusetts became the first state to enact a universal health-care coverage plan. Under the plan, businesses are required to pay a premium of $295 per employee per year. The law mandates that all firms with 10 or more employees offer coverage and that individuals without health insurance coverage must obtain it from a state-approved firm or face a penalty of $1,000 if not enrolled by July 1, 2007. Premiums for the plan range from $18 to $170 per month based on income.

In May, 2006, Vermont enacted its own universal health-care plan. The state's plan requires employers that do not offer health insurance coverage or that have workers who are ineligible for health insurance coverage (other than part-time or seasonal workers) to pay a fee of $365 per person per year to help offset a state-subsidized, privately run plan.

Fed Plan Seeks Tax Parity

At the federal level, President Bush has proposed a plan that seeks to use tax incentives, rather than encouraging or subsidizing the purchase of individual coverage through the current employer-based system. In his January, 2007, State of the Union address, the President proposed tax deductions for those who currently have no health insurance but who elect to purchase it themselves (rather than through an employer-sponsored plan). He also proposed additional standard deductions of $15,000 for families and $7,500 for individuals, thereby sheltering those amounts from payroll taxes and allowing the savings to be used to defray the cost of purchasing health insurance.

At the same time, under the President's proposal, employer-provided health insurance would become a taxable benefit: Those receiving health insurance through their jobs would no longer receive a tax advantage on this benefit. The ultimate effect of the proposal would be to equalize the tax treatment between those with self-purchased health insurance coverage and those who participate in employer-sponsored plans.

The President's plan also includes an Affordable Choice Initiative that would help states make basic health insurance available to those who cannot afford it, by redirecting subsidies for hospitals that care for the poor to state insurance pools.

Congress Seeks to Expand SCHIP

As they move toward universal coverage, politicians from both sides of the aisle have felt the pressure to continue extending coverage to uninsured children. The issue has been which children would qualify for subsidized coverage—and how much it will cost the government. The week of Sept. 24, both the House and Senate passed legislation that expanded funding for the State Children's Health Insurance Program (SCHIP), from the current annual budget of $5 billion per year to $12 billion per year over the next five years. The current legislation would increase the potential number of children to be covered from the current 4 million to an estimated 8 million.