I hesitate to wade into the quagmire that is politics, particularly regarding the Affordable Care Act (aka Obamacare), but good trading and investment decisions require at least an understanding of the issues. In the current US environment it seems that anything which challenges preconceptions is dismissed as bias; the best I can hope for here is to be accused of bias by both sides. I can assure you that, as I have been trained to do, I look at this purely from an investment opportunity perspective. The desirability or otherwise of the law could be debated ad nauseum, but my concern is how best to profit from the realities of it.
This is the way traders are. They may have political views, but they are trained to assess potential economic effects and act on them.
I have been following markets, and the political influences on them, for around 35 years. In that time, I think that Obamacare is probably the most misunderstood piece of legislation I have seen. People on both sides of the political divide have attached qualities, and therefore consequences, to the law that simply don’t exist. Obamacare is not a cure for all of the forthcoming problems that demographics will present, nor is it a calculated attempt to destroy the US.
It is wide-ranging and many of the potential consequences are unknown, but let’s look at what we do know. The individual mandate will result in more people buying health insurance. In most States, Medicaid will be expanded. There will be a tax on medical devices. There will be attempts to save Medicare money by cost control. Assuming the law remains unchanged and unrepealed these things will happen, so we should look at opportunities based on them.
As far as the potential effects on the healthcare industry, the market has spoken loud and clear.
The above is a chart for the Vanguard Healthcare ETF (VHT) since President Obama’s reelection in November of last year. Based on this, we can only assume that the market believes the law will not harm the sector, rather it will benefit it. In the event that the market is correct, and Obamacare is a net benefit to the healthcare sector, however, it is unlikely that those benefits will be evenly distributed.
The problem with legislated change such as this for stock pickers is that policy, not consumer preference, will pick winners and losers. In the State where I live, for example, only Blue Cross and Blue Shield plans will be offered on the new exchanges. This could, of course change in the future, allowing political decisions to directly influence the profitability of certain insurance companies. It also means that some industries within the sector will do better than others.
Let’s look at some potential winners and losers.
The most obvious winners are the insurance companies. Criticism of Obamacare from the Left of US politics always starts with it being a giant hand-out to health insurers. From an investor’s perspective the problem is that a lot of future gains are already priced into the insurers stock. That said, the influx of new clients will provide a floor to the stocks so buying in, even at these elevated levels looks to be a fairly low risk strategy so long as legal challenges to the law continue to fail.
Of course, not all insurance companies will benefit equally. A Wall Street Journal article last month suggested that the big companies were shying away from the exchanges and that smaller, regional companies would be best positioned to benefit. The thing about some of these companies, such as Centene (CNC) and Molina (MOH) is that they are also big players in the Medicaid provider sphere, and that area is bound to grow under the new law. For the same reason, don’t ignore traditional big players who have large exposure to that market, such as United Healthcare (UNH) and Wellpoint (WLP).
Finding possible losers takes a little more imagination, but as it seems that everything has been dragged up by buoyancy in the sector may, in many ways be easier.
Heathcare property REITs are among my least favored stocks right now. The largest of them, HCN, collapsed in May as interest rates began to climb, but is still up over 20% since the last Presidential election.
While Obamacare does expand their customer base, or rather make it more likely that they will get paid for treating people, some of those benefits could be offset by Medicare savings called for elsewhere in the law. When we think of lower payments to providers, we tend to think of doctors, but hospitals and residential care homes are also providers of healthcare.
It is not that I think hospitals will be hit hard, it is just that their share of any benefits could turn out to be less than the current stock price is assuming. Add this to the possibility of still higher interest rates in the next couple of years and healthcare REITs look like potential losers.
Medical device makers face a 2.3% tax on their products as a result of Obamacare proceeding unchanged, and the added pressure of a Medicare system looking to control costs. Despite that, the big players such as Medtronics (MDT) and Stryker (SYK) have had stellar years, both improving over 25% since the election in November 2012, and look vulnerable should revenues stall as the law’s provisions take hold.
Whatever happens, as things unfold, some companies will benefit and some will not. It has been said by both supporters and critics of Obamacare that not all of the effects of the law can be known yet, and that many won’t be felt for a long time to come. What we are left with, therefore, is what we do know, and plain common sense dictates that we base current decisions on that, not on our desire to see the law fail or succeed. Once again, put politics aside and concentrate instead on reality. Your 401k will thank you.