With or Without "Obamacare," Healthcare Stocks Are Headed Higher

Source: Don Miller, Money Morning  (4/2/12)

"With the bill's fate up in the air, major players will have to devise new strategies for either outcome."


The fat lady hasn't sung yet. . .but she is warming up.

Three days of arguments before the Supreme Court have made it abundantly clear—"Obamacare" is in danger of being gutted or completely wiped off the books.

Only one thing's for sure. Investors will want to keep buying healthcare stocks—especially as 10,000 baby boomers a day turn 65 years old for the next 20 years.

But there's one segment of the healthcare sector that will be sitting in the driver's seat when it comes to delivering healthy profits and investment returns—no matter how the court rules.

Here's what you need to know. . .

Obamacare's Confusing Details

Fact is, analysts have been struggling to figure out how the Affordable Care Act (ACA) would impact various segments of the healthcare sector ever since the bill was passed.

"For most companies, the bill is neither very good nor very bad," Dan Mendelson, CEO of Avalere Health, told NPR after the bill passed in 2010. "Across each of the different segments there are pieces that will be good and pieces that will be more challenging."

That's because in addition to a slew of new taxes on pharmaceutical, hospital, and insurance businesses, Obamacare includes a dizzying array of incentives that will have a dramatic effect on industry profits.

Uncertainty surrounding the law is already rattling stocks.

Healthcare stocks have underperformed the broader market this year, up 6.4% compared to the S&P 500's 11.6% gain.

With the bill's fate up in the air, major players will have to devise new strategies for either outcome.

What Obamacare Means for Healthcare Stocks

Here's what the law might mean for major players.

Big Pharma: Big drug makers like Pfizer Inc. and Eli Lilly & Co would pay about $85 billion over 10 years to fund ACA. They also made concessions that would save the Medicare system billions of dollars a year.

In return, they were able to kill a proposal to allow cheaper prescription drugs from Canada and were granted longer patents on generic versions of biotech drugs.

On balance, they probably would come out ahead.

Insurance Companies: The picture appears positive for insurance companies. The infusion of 40 million new people into the system is seen as a gigantic shot in the arm.

But there are huge tradeoffs.

Most importantly, the insurers would no longer be able to deny people coverage based on pre-existing conditions. They also would face billions of dollars in new taxes and restrictions.

But insurers supported the plan for one simple reason—they can pass any cost increases on to their customers.

Hospitals & Doctors: Over the next 10 years, hospitals and doctors would contribute $155 billion to paying for the legislation by taking smaller payments from Medicare and other government programs.

But if the court rules that the individual mandate is constitutional, hospitals would no longer be forced to treat patients who can't pay for their services.

The Ultimate Winner in the Obamacare Debate

There's only one sector that is likely to benefit no matter what the court decides.

Managed care companies, typically known as Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO), are already heavily involved in reducing health care costs.

They do that through a variety of techniques to reduce unnecessary health care costs by reviewing the necessity of services, controlling admissions and lengths of stay and intensive management of health care cases.

Although widely criticized for denying medical services, they are also credited with subduing medical cost inflation.

But here's the kicker: fully 90% of insured Americans are enrolled in plans with some form of managed care, according the industry's trade association.

That puts them in a position to profit delivering investors solid returns for years to come—no matter how the Supreme Court weighs in. – Don Miller, Money Morning

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