as part of our
While this year's presidential election was critical to the
economic future of the US, it posed particularly significant
ramifications for the health care sector and its investors.
After pushing the Patient Protection and Affordable Care Act
(PPACA) through Congress in his first term, President Obama knew
it was vital to win re-election and maintain control of the Senate
to prevent a roll back of his landmark reform. Republicans had made
it clear that repealing the PPACA would be one of their first
priorities if given control of the government.
On November 6, the American electorate decisively re-elected the
president. In the Senate, the Democrats picked up two seats and
expanded their thin majority, to 55-45. Although Republicans
maintained firm control of the US House of Representatives, the
GOP's aspirations of repealing "Obamacare" are dead.
Over the next four years, changes under the PPACA will become
entrenched in the American health care system. On January 1, 2014,
the individual mandate requiring all Americans to carry health
insurance or pay a penalty to the federal government will come into
On that day, US companies with more than 50 employees will find
themselves facing a "play or pay" mandate, requiring them to offer
health insurance to employees or pay stiff penalties. The first
state health insurance exchanges also are slated to open for
business and Medicaid will see a radical expansion of its
Thanks to those new rules, it is estimated that as many as 32
million Americans will find themselves newly insured in 2014. All
those covered patients will be a boon for the American health care
system, especially since the population is rapidly aging.
Health care costs are expected to account for one-fifth of US
gross domestic product by 2021 (see "Health Sector: In the Pink").
As health care companies compete for their share of this huge and
growing money pool, the PPACA and other actions by Congress have
winners and losers
America's hospitals are the most salient beneficiaries of the
PPACA. The day following the election, shares of
), the largest for-profit hospital system in the US with 163
facilities throughout the country, gained nearly 10 percent.
Regardless of whether a hospital system treats it as charity
care or simply uncollectable debt, unreimbursed medical attention
is a major expense for hospital operators. According to data from
the American Hospital Association (AHA), uncompensated care on
average accounts for about 6 percent of total hospital
In 2009, the latest year for which the AHA has complete data
available, that amounted to more than $39 billion across its member
hospitals. As a result of the recession and high unemployment,
it's estimated that uncompensated care topped $45 billion last
HCA reserves about 9 percent of revenue in an average quarter
for doubtful accounts, stemming from a federal law that requires
all hospitals accepting federal funds to provide stabilizing
treatment to every patient who comes through the doors. Without
having to reserve so much against losses on uninsured care, HCA
should see an almost immediate pop of at least 6 percent in revenue
in the first quarter of 2014.
Given that HCA has proven extremely adept at controlling
costs-it has one of the highest operating margins in the
business-the positive effect could be even greater.
While I disagree with Wall Street's assessment that most
insurers involved with Medicare and Medicaid will be losers, this
negative view is on target when it comes to most medical device
Medical device manufacturing includes everything from
artificial joints to hip replacements to heart stents. As part of
the PPACA's funding mechanism, makers of medical devices will be
subject to a 2.3 percent tax on device sales.
Lawmakers' rationale is that device makers will compensate for
the tax with a higher volume of sales, but the new tax is likely to
prove a major headwind regardless of whether more devices are
Most recipients of artificial knees and hips tend to be older
Medicare patients. Hospitals purchase the devices and pass the
costs along to patients, making these purchases extremely cost
sensitive because hospitals receive a fixed reimbursement from the
government that will soon be subject to caps.
While the tax is kicking in, device manufacturers will also get
hit with intensifying price competition, making it nearly
impossible to pass along additional costs.
Consequently, a wave of consolidation is likely to occur in the
medical device business over the next couple of years, as those
with the strongest balance sheets either acquire or simply outlast
their weaker competitors.
To grow earnings in the intermediate term, device makers will
be forced to cut costs and buyback shares, a course of action many
of them won't be able to afford.
Companies such as Stryker Corp (
), which have low debt and broader exposure to foreign markets,
should emerge from this transition period relatively unscathed. In
addition, Stryker offers a broad line of medical equipment not
subject to the tax, such as surgical tools and hospital beds.
Still, the entire device industry will experience a great deal
of volatility thanks to uncertainty in the market generated by the
tax. This health care niche should be avoided by all but the most
aggressive investors. For more winning and losing stocks under
Obamacare, see Jim Fink's excellent July, 2012 article titled,