How Will ObamaCare Impact Your Healthcare Portfolio?
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I never did appreciate how the bill for universal healthcare reform became known as “ObamaCare.” Politics aside, this bill was a game-changer. It was a supreme example of how one piece of legislation could have an impact on the system as a whole.
As we near election day, one wonders what could happen to this system if the legislation is overturned. Moreover, what would the impact be on not just the health field, but on the market as well?
What Has Happened
Pharmaceutical companies were strangely silent in the healthcare reform debate. Several pundits assumed it had something to do with a closed-door deal with President Obama not to oppose the health care law.
The law has been little more than a mixed bag for companies. With an additional 30 million people added to the consumer base of insurance, it can be reasonably assumed more drugs and medications will be purchased. There was also a change to that pesky Medicare “doughnut hole,” the unfortunate gap in assistance with drug coverage for seniors who reached a specified limit.
But the law’s emphasis on bringing down health costs, and imposing new fees on the industry have already begun to cut into profit margins. In an estimate by the Wall Street Journal, the industry will face around $80 billion in fees and rebates over the next ten years. The main example of this is how drug companies have had to discount drugs that fall into the “doughnut hole”.
Who is Involved?
Big name pharmaceutical companies and their stocks such as Merck (NYSE: MRK) have held strong based on their stable leadership and market focus. Merck is a global health care company that delivers health solutions through its prescription medicines, vaccines, biologic therapies, and consumer care products.
Merck has an interesting strategy of marketing directly and through its joint ventures. One such example that has recently got it into some hot water is unwisely marketing to children through the use of movie cartoon characters. Even with complaints such as these, Merck has recently shown good progress as the company’s rating recently jumped from a B (“buy”) to an A (“strong buy”).
Another company that is maintaining its impact is Pfizer (NYSE: PFE). Pfizer's dividend has been a big draw for investors. The stock has seen an almost 10% rise since the first quarter. However, Pfizer is looking at keeping that edge through shedding some businesses to focus on its core pharmaceutical products. There are also talks of spinning off about 20% of its animal-health business, Zoetis, in an initial public offering in the first half of next year.
It’s not just the large companies that have seen movement in the wake of ObamaCare. Niche-market powerhouses are also keeping a close eye on the ballot box. Heel That Pain, a provider of health products aimed at eliminating heel pain, launched its website in 2001. The company educates visitors about heel pain and plantar fasciitis and provides products to help treat pain. The company also offers helpful videos and free information about heel pain.
Heel-That-Pain.com is using its focus as a tool to grab up market share. The company targets a specific need, connecting consumers with products and treatments for foot pain. Through providing this unique service, as well as offering a user-friendly, ever-expanding site with new and updated information, it can connect with consumers in a way the mass appeal companies cannot. And connecting with consumers is the name of the game now. With many more options becoming available under ObamaCare, the burden is on the company to conduct a competitive analysis review of other competitors’ ads, and determine how to position themselves against them.
As is the case with most companies, the fate of pharmaceutical companies is wrapped up in public perception more than anything else. So what would happen to these stocks if ObamaCare was overturned? The answer is, surprisingly, not much.
What Will Happen
Certainty is security, and most healthcare stocks will benefit simply by having a definitive answer on the fate of the law. A decision would lift the air of questions hanging over the sector since 2009.
If ObamaCare were to be implemented, some healthcare stocks such as Amerigroup (NYSE: AGP) and Centene (CNC) would undoubtedly take a severe hit. This is because the legislation was looking to add as many as 16 million to 20 million more Americans to Medicaid. Without that number, these companies suffer. Amerigroup has been doing well in recent times. The company currently has a debt-to-equity ratio of 0.35, which is below the industry average. Amerigroup has seen its operating cash flow jump by 131.67%, to $72.12 million, compared to the same quarter in 2011. But all this would change if ObamaCare was implemented.
Hospital chains would also be on the losing end if ObamaCare is implemented. Hospitals used to benefit financially by losses they incur by treating the underinsured or uninsured. This is similar to what other businesses do with ‘write-offs’. The healthcare mandate would wipe out losses they incur from treating uninsured patients. Thus, some hospital chain stocks include Tenet Healthcare (THC) and Vanguard Health Systems (VHS) could be forced to absorb this substantial cost.
The healthcare stock sector that stands to gain the most if the legislation is overturned includes the more diversified companies, much like the pharmaceutical companies previously mentioned. The deals the pharmaceutical companies made (both public knowledge and closed door) to provide discounts for government programs like Medicare and Medicaid would be too much trouble to change no matter what becomes of ObamaCare.
As previously stated, the biggest benefit may be reducing the uncertainty and risks for the pharmaceutical industry that would follow from an overturning of the overhaul. Striking down some or all of the plan could mean reopening for discussion proposals that industry managed to fend off during the drafting of the original Affordable Care Act.
All in all, the restructuring, improved cash flows, and new product flow that more companies must provide give the sector a relatively strong outlook. The fluctuation of stocks over the last few weeks and months have been primarily tied to lingering concerns over this legislation. Thus, after November, companies will find a sense of stasis and can begin to focus on what they do best: namely, providing pain-relieving treatments and products.
Because of that, investors need to “look back at fundamentals” in picking stocks. Look to their performance pre-Supreme Court battle. Include those companies who show an aptitude for effective marketing, and who “keep the main thing, the main thing” – meeting customer need.
Against such things, there is no law.
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