How To Invest In The Future Of American Healthcare

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I don't like playing "futurist". I'm going to try not to sound like an ineffective political campaign commercial, but the only way I can describe the healthcare in the United States is that it is broken. It may be beyond repair in its present form. I say this as both an expert and a consumer.

The United States has the highest healthcare spending as a percentage of GDP among developed nations throughout the world. Currently, the nation spends 17% of its annual GDP on healthcare. In dollar terms, that comes to $3.06 trillion. The average amongst our peers is just under 11%.

In per capita terms, according to research from George Mason University, the United States spends, on average, $8,508 per person on healthcare. The average among developed nations is less than half of that, at $3,322.

Meanwhile, as our healthcare costs escalate, so does our aging population. Pew research has determined that 10,000 members of the baby boom generation turn 65 every day. By 2030, when all boomers are 65 or older, they will account for 18% of the nation's population. While I am an eternal optimist, I sincerely doubt the ability of our current healthcare system to care for a sickly and aging population of that size.

I firmly believe that, despite conventional wisdom, the United States will be forced to adopt a single-payer health system. My guess is that it would resemble Canada's public/private hybrid platform. It's coming. It's just a matter of time.

What A Single-Payer System Will Mean

The most likely scenario will be an expansion of Medicare and Medicaid. Income limits for Medicaid eligibility will rise. Everyone else will have access to Medicare. Despite my mother-in-law's complaints, Medicare works OK. Letting everyone in makes the most sense.

Naturally, any kind of huge paradigm shift in an industry will cause enormous disruptions. Winners and losers will be chosen.

Now, when I say "losers", that doesn't necessarily mean entire companies will disappear. They will just have to adapt and will probably be less profitable going forward. The value of their stock prices will shrink and adjust to the new reality.

The most obvious candidates are mega-cap, pharmaceutical companies, such as Johnson & Johnson (NYSE: JNJ ), Bristol-Myers Squibb (NYSE: BMY ), Pfizer (NYSE: PFE ), and the like. Big pharma stands to lose the most in a "Medicare for All" world for obvious reasons: the government will dictate prices for prescription drugs.

Generic makers such as Mylan Labs (NYSE: MYL ) and Teva Pharmaceutical (Nasdaq: TEVA ) will not be immune. Even though they add value to the market place, their already razor-thin margins will be squeezed under any form of government price controls.

Medical device makers will also be in the price-control crosshairs. If the government can mandate drug prices, the same can be expected for pacemakers, artificial joints and other devices. Companies such as Medtronic (NYSE: MDT ) and previously mentioned pharma giant Johnson & Johnson will find themselves adjusting to a new paradigm.

Finally, health insurers and hospital companies will be the most negatively affected industries during the emergence of single-payer healthcare. Rather than outright failure of some businesses, we'll see a gradual consolidation for efficiency. The proposed CVS (NYSE: CVS ) Aetna (NYSE: AET ) merger is a prime example.

Under a single-payer system, healthcare becomes a regulated utility much like electricity with just a few large, best-in-class players. Athenahealth (Nasdaq: ATHN ) could combine with Walgreen Boots Alliance (NYSE: WBA ). Maybe each monolith will cover a specific region like Southern Company (NYSE: SO ) and Consolidated Edison (NYSE: ED ).

It may be too early to call winners, but a retooled American healthcare system will put more emphasis on primary and preventive care. According to data from the Organization for Economic Cooperation and Development (OECD), nations with a higher density of general practitioners (GPs) have higher life expectancy at birth. Among high income countries, Canada, France, and Germany lead the way with an average of 1.5 GPs per 1000 citizens.

Sadly, the United States doesn't rank with other high-income nations. We sit next to last, behind Turkey, with roughly 0.22 GPs per 1000. We barely beat India, even though it has a population of about FOUR TIMES that of the United States.

That's embarrassing. And dangerous.

With the need for primary and preventive care emphasis, the obvious winners would be the aforementioned CVS and Walgreens as they scale up their in-store clinic concept. Diagnostic equipment makers such as the recently hammered General Electric (NYSE: GE ) and Siemens AG ( SIEGY ) could also see a boost.

And while the big drug companies will experience a significant adjustment, biotech companies, with their focus on long term results and outright cures in some cases, are probably poised to perform. The best way to get invested would be with the Biotech Spider ETF (NYSE: XBI ) .

Last but not least, the conversion and consolidation of the American healthcare colossus will be a bonanza for tech companies engaged in networking, software, and the cloud. Those best suited to handle the task are the usual suspects: Cisco Systems (Nasdaq: CSCO ) , Microsoft (Nasdaq: MSFT ) , IBM (NYSE: IBM ) , CA Technologies (Nasdaq: CA ) , Oracle (Nasdaq: ORCL ) , and Hewlett Packard (NYSE: HPE ) .

Missing from the tech rodeo are the FAANG stocks. Facebook (Nasdaq: FB ), Apple (Nasdaq: AAPL ), Amazon (Nasdaq: AMZN ), Netflix (Nasdaq: NFLX ), and Google (Alphabet) (Nasdaq: GOOG ). These companies are too busy reshaping global consumerism.

But what about Amazon? Aren't they trying to take over the planet? Yes, mostly. But I don't see them jumping into the healthcare fray.

Action To Take: I know -- It's a lot to take in. But the tell is in the life expectancy number based on the GP population penetration. The United States should be in the same league as our wealthy peers. Some form of single-payer healthcare system is most likely the wave of the future. Economics and demographics, not politics, always dictate change.

The question is timing. Timing the market is a fool's errand and a tectonic, industrial shift of this size will be a long, messy process. Wise investors should keep an eye on positions with gains in the loser category. Taking partial profits over time is not a bad idea. Nibble at the projected winners as buying opportunities (i.e. pullbacks) present themselves. It will not be a pretty ride. However, as a nation, we will get through it. We always do.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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