Earlier this week in Supreme Court Upholds Obamacare as a Tax Increase, I explained why Obamacare is both bad public policy and unconstitutional. But so what? Obamacare is the law of the land and there’s nothing I or anybody else can do about it. Nothing, that is, until the November 6th U.S. presidential election. With the Supreme Court having failed to do its job protecting the constitutional framework of states’ rights and limited federal power, the only chance left for getting rid of Obamacare is to get rid of Obama.
On Wednesday July 11th, the U.S. House of Representatives voted to repeal Obamacare by a wide margin – 244 to 185 – but it faces a certain presidential veto. According to Intrade.com, Obama is still favored to win re-election (55% chance), and a recent Pew Research Center poll also spells good news for the president, so investors have a choice to make:
(1) Bitch and moan about Obamacare while sitting on their hands; or
(2) Try to make some money by figuring out which healthcare stocks under Obamacare are winners and which are the losers.
Under Obamacare, Americans are going to be taxed up the wazoo, so doesn’t it make sense to try to make some extra money in the stock market in order to be able to afford to pay the increased tax burden?
Back in March when I wrote Obamacare at the Supreme Court: Healthcare Stocks Need “All or Nothing”, my preliminary thought was that virtually all healthcare stocks would benefit if Obamacare was upheld in full (i.e., individual mandate, Medicaid expansion, acceptance of pre-existing conditions, medical loss ratio minimums) because of the huge increase in federal healthcare spending and the 32 million additional people insured (half Medicaid expansion and half individual private insurance).
But I’ve changed my mind thanks to more study of the issue. All one has to do is look at the varied reaction of different healthcare sub-sectors after the Supreme Court ruling to realize that not all healthcare stocks will benefit under Obamacare.
Health Insurers Aren’t The Winners Most Expect Them To Be
Okay, here comes a big mea culpa. In the March article I said point-blank that:
Healthcare insurers were going to do fine under Obamacare because the individual mandate and Medicaid expansion requirements promised to greatly increase industry revenues and counteract the pre-existing condition and medical loss ratio cost burdens.
Dead wrong. When I performed a stock screen of the worst-performing healthcare stocks between June 27th (the day prior to the Supreme Court ruling) and yesterday (July 12th), the worst was a 43% decline in MAKO Surgical (NasdaqGS: MAKO) – which I advised selling in May — but virtually all of the other top losers were health insurers:
- Wellpoint (NYSE: WLP): -11.1%
- Aetna (NYSE: AET): -7.4%
- Humana (NYSE: HUM): -6.3%
- UnitedHealth Group (NYSE: UNH): -5-5%
- Cigna (NYSE: CIG): -5.2%
- Coventry Healthcare (NYSE: CVH): -4.5%
I can’t tell you how many analyst reports I’ve read that are convinced Obamacare is good for health insurers simply because of the 32 million additional people that will get insurance. The more people insured means more people are paying insurance premiums which boosts health insurers’ revenue. For example, Morningstar calls Obamacare a “net positive” for health insurers, but the analyst’s reasoning is convoluted. He admits that the law imposes value-crushing burdens on the insurers, but then dismisses these burdens as things that would have been imposed anyway without Obamacare. In other words, he ignores all the bad parts of Obamacare before analyzing it and concludes it’s a good thing because of the added revenues. Nuts!
One estimate forecasts insurers gaining $1 trillion in additional revenue over the next eight years. But what these analysts fail to fully factor in are the “strings attached” to these new revenues – namely:
1. Higher costs from hundreds of billions in insurance premium taxes, as well as being forced to insure pre-existing conditions, which are sure-fire money losers (i.e., more claims paid out than premiums received).
2. Lower revenues from oppressive government regulation of insurance premium levels, forced rebates to customers when medical loss ratios are too low, and lost business resulting from: (a) cheaper insurance offered by government-run insurance exchanges; (b) employers refusing to offer health insurance programs to employees; and (c) individuals refusing to purchase insurance coverage altogether because it is much cheaper to pay the law’s penalty fees.
When you take account all of the effects of Obamacare and not just the increased revenues from having more insured people, there is absolutely no reason to believe that health insurers end up better off. In fact, Moody’s has determined that Obamacare is a “credit negative” event for health insurers:
This view is based on the additional regulations and restrictions imposed on insurers, which include limits on profitability through minimum medical loss ratio regulations; new taxes and assessments that exacerbate the affordability issue as insurers seek to pass these costs on to consumers; and reductions in revenues, both explicit (Medicare Advantage reimbursement reductions) and implicit (more aggressive review of rate increases).
In addition, the mandates for individuals and employers, combined with the lack of a meaningful penalty for non-compliance, promote anti-selection (as healthy individuals forego coverage) and threaten to undo the traditional employer-provided healthcare structure (as employers eliminate their benefit programs).
Even worse, a University of Maryland business school professor warns that private health insurers may not survive at all once the government-run insurance exchanges get up and running in 2014 and begin to compete against them:
Public [health insurance] options will be advantaged by larger taxpayer contributions and exemptions from critical regulations imposed on private insurers. Businesses will have a strong incentive to push employees into one of the two public plans or drop coverage altogether and pay the $2,000 penalty imposed by the ACA. Middle and upper income employees displaced from employer-based plans will likely find one of the “public options” the least expensive and most sensible choice.
The [government]-sponsored plans are a Trojan Horse. They will be advantaged over private insurers even with the individual mandate helping pull down the latter’s costs per enrollee. With the ACA pushing health care costs ever higher, the artificial price advantage of government-sponsored insurance will be too big to resist.
Medicaid Nation: Single-Payer System is Inevitable Under Obamacare
In an article by the CFA Institute, the federal government’s “Trojan Horse” of health insurance exchanges is part of “Phase II” in the metamorphosis of the U.S. healthcare system into a completely government-run single-payer system like those that exist in England and Canada:
The government will create exchanges to sell government-run policies in competition with the private market. Because it is the U.S. federal government, it has the power to negotiate prices below the private market and thereby force additional costs onto private insurers, just like Medicare.
Over time, this will erode the competitiveness and solvency of the private insurance plans. As they struggle for growth and then survival, they will be forced to steadily raise prices, leaving them vulnerable to political attack as the “bad guys.” This phenomenon will take about ten years to fully play out. Nevertheless, the economics of the private health-care business will be dramatically changed and the franchise values of UnitedHealth Group, WellPoint, and Aetna will be harmed substantially, and likely fatally, as they will for most private insurers. Phase II clearly paves the way for a single-payer system.
The example of England’s National Health Service is frightening. A government-run system uses public money to pay for health services. Whenever “other people’s money” is used to buy things, there is no cost discipline and price inflation goes through the roof. Remember the $400 hammers and the $640 toilet seats? The result is that more money is needed simply to buy the same amount of services. More people insured, more money spent, and no more service results in both rationed care and low-quality care when care is provided. This sorry phenomenon of costs spiraling down a black hole of government bureaucracy is known as “Gammon’s Law.” As Sally Pipes of the Pacific Research Institute puts it:
The British healthcare system may “guarantee” access to care — but that doesn’t mean patients actually receive it.
Even if some private health insurers manage to survive, the only survivors will be those that act as vassals of the government within the public exchanges. They will be forced to accept drastically-reduced reimbursement rates for medical services as the government has to battle its ballooning budget deficits. In fact, all healthcare companies – not just insurers – will become vassals of the government and become beggars for government reimbursement because the government will be in charge of the purse strings.
Many doctors refuse to accept Medicaid patients because government reimbursement rates are too low. But with Obamacare, they will soon have no choice. The entire country will become Medicaid Nation – a thousand miles wide but only one inch deep. Cheap preventative care will become available to all but heaven forbid if you need sophisticated healthcare.
Medical Device Companies Are Big Losers
Besides health insurers, other losers include medical device companies that are now subject to a 2.3% sales tax that could easily make high-cost equipment uneconomic to manufacture when combined with lower reimbursement rates. More insured people won’t help because medical devices are primarily used by old people – who are already covered under Medicare. Bottom line: The recent price plunge in medical equipment company MAKO Surgical is just the beginning of the carnage; state-of-the-art medical equipment has no place in Medicaid Nation.
Medicaid Companies Will Do Well
The big winners of Obamacare are those healthcare companies that already act like Medicaid vassals of the government:
Wellpoint just bought one of the largest Medicaid-centric companies in AmeriGroup (NYSE: AGP), which is a telling example of the move towards Medicaid Nation. Similarly, German company Linde AG just bought Lincare Holdings (NasdaqGS: LNCR), a home-therapy company that receives two-thirds of its revenue from Medicare and Medicaid.
Acute-Care Hospitals Could Be Winners — Temporarily
Besides Medicaid companies, other Obamacare winners might be acute-care hospitals that offer emergency-room services. These hospitals are not allowed to turn away the uninsured that need life-saving high-cost emergency care and consequently have had to eat the cost of servicing these poor folks. Analysts estimate that non-compensated emergency care often runs upwards of 35% of total emergency-care revenue, so getting more people insured – and paying – helps the hospitals reduce uncompensated costs. Examples of acute-care hospitals include:
- HCA Holdings (NYSE: HCA)
- Community Health Systems (NYSE: CYH)
- Tenet Healthcare (NYSE: THC)
- Health Management Associates (NYSE: HMY)
- Vanguard Health Systems (NYSE: VHS)
While these features should result in a material reduction in uncompensated care provided by not-for-profit hospitals, they do not offset the reimbursement pressures included in [Obamacare], which are elevated given the scope of the federal budget deficit and the need to find additional savings in Medicare and Medicaid funding.
Moody’s warning applies to non-profit hospitals, but there isn’t much difference between non-profit and for-profit hospitals in terms of costs or care, so for-profit hospitals may similarly get hit.
Assuming for-profit hospitals do end up benefitting at least a little, any company that provides tangential services to acute-care hospitals will also benefit, such as Air Methods (NasdaqGS: AIRM), which provides emergency transportation via helicopter to hospital emergency rooms.
Primary Care and Backoffice Services Are Also Winners
In Medicaid Nation, cheap healthcare that focuses on prevention is supreme – in stark contrast to expensive healthcare that focuses on cures. This means that companies that provide basic medical supplies (e.g., bandages, tongue suppressors) for primary care doctors like PSS World Medical (NasdaqGS: PSSI) should do well. Companies that perform basic health-screen tests like Quest Diagnostics (NYSE: DGX), Laboratory Corp. of America (NYSE: LH), and Myriad Genetics (NasdaqGS: MYGN) should cash in on the Obamacare expansion.
More patients mean more dirty linens and floors that need to be cleaned, which will benefit cleaning companies like Healthcare Service Group (NasdaqGS: HCSG) and Ecolab (NYSE: ECL). More medical waste will be generated, which increases the need for disposal services provided by trash companies like Stericycle (NasdaqGS: SRCL).
Lastly, the massive new government health bureaucracy will need record-keeping, billing, and cost-containment services from companies like:
- HMS Holdings (NasdaqGS: HMSY): cost-recovery, billing, and audits
- Maximus (NYSE: MMS): program eligibility and enrollment
- CorVel Corp. (NasdaqGS: CRVL): claims management, billing, and cost-containment
- PRGX Global (NasdaqGM: PRGX): cost-recovery, billing, and audits
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