Obamacare Delays: Investors in Healthcare Beware
Kyle is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Key provisions of the Affordable Care Act (aka “Obamacare”) have been delayed, and investors in the health care sector should get a second opinion.
Obamacare was originally planned to kick in next year. But the White House recently announced the mandate for covered employers to provide health insurance has been delayed until 2015. There are far reaching economic impacts of this new twist far more important than the chatter of pundits and politicos.
How ACA delays affect the health care sector
As has widely been reported, the requirement for employers with 50 or more people to provide health insurance has been delayed by executive fiat until 2015. Some healthcare sector analysts argue the delay may be bad news for affiliated hospital chains.
This includes large hospital outfits like Health Management Associates (NYSE: HMA) and Tenet Healthcare (NYSE: THC). Initially these companies were banking on more individuals having access to health insurance coverage. And greater access to health insurance means more patients would seek hospital care. Investors bought into this notion and pumped up the share price of these companies in the past year.
But the employer mandate delay may have curbed investor enthusiasm. In fact, the share price of each has fallen by more than 4% since the Administration’s announcement.
In addition to the employer mandate, another key provision has stalled. The Small Business Health Options Program (SHOP), the national online insurance marketplace, was slated to be up and running in October 2013. Now, these exchanges are stuck in neutral until 2015. The Administration claims this is due to operational challenges.
Health insurance companies like United HealthCare (NYSE: UNH) said they planned to participate in the exchanges. The reason for this is simple: the health care exchanges will affect their market share. This is due to inevitable pricing disadvantages that could force health insurance providers like United to withdraw from certain markets. But the delay could be beneficial for the company’s bottom-line until the so-called operational challenges are remedied.
Aetna (NYSE: AET) may also benefit from the SHOP stall. The company reportedly sent a letter to the White House earlier this year regarding “logistical problems” with the health exchange scheme. Moreover, the firm’s Chief Executive has previously argued Obamacare could trigger a spike in premiums to about twice their current levels. This will prompt some businesses to shop around for other health insurance – and shift premium costs to employees.
What Obamacare Delays Mean for Investors
Since the financial crisis in 2008, health care has been a safe harbor in the national economy and a profitable one as well. The saddest part of all these developments is the adverse impact on the broader health care sector. The delays and funding shortfalls of the Affordable Care Act are creating uncertainty - and uncertainty is not good for investors.
Although businesses have been given a reprieve from the mandate to provide health insurance until 2015, individuals are still required to get their own insurance or buy into Obamacare in 2014. But this begs the question of how they can do so, since the health exchanges are not ready. As for the employer mandate business owners will still be required to provide health insurance after the mid-term elections in 2014.
As it stands now, the mandate applies to companies with 50 or more employees. But some lobbying groups are calling for the number to be raised to 100. Further, some GOP lawmakers contend the individual mandate should also be put on the back-burner until 2015.
But these are political calculations far beyond present investing options. So, investors may be able to find profits in one of the health insurance providers mentioned above until 2015. And for those with a long term view, there are alternatives.
In particular, a large-cap outfit like Johnson & Johnson (NYSE: JNJ) should be able to circumnavigate the Obamacare sand bar.
Johnson & Johnson is a leader in the medical services sector. The company’s earnings are driven by sales of prescription drugs and demand for its medical devices. Here, the only threat posed by Obamacare is the 2.3% medical device tax that went into effect this year. However, this tax has only had a marginal impact on Johnson & Johnson’s earnings.
The company’s second quarter results bear this out. Johnson & Johnson reported higher-than-expected second-quarter earnings. This stems from strong sales of prescription drugs and medical devices. The company earned $3.8 billion, or $1.33 per share, and this beat expectations on the Street. However, the question remains as to how much higher the stock will climb. The share price has run up to about $90 so some profit taking may be on the way.
The Bottom Line
In the final analysis, Obamacare from a policy perspective has serious flaws and economic shortcomings. It is highly unlikely the law will be repealed, as some GOP lawmakers hope. But modifications are much needed. In the meantime, investors in the healthcare sector should proceed with caution.
More on Obamacare
Obamacare will undoubtedly have far-reaching effects. The Motley Fool’s new free report, “Everything You Need to Know About Obamacare,” lets you know how your health insurance, your taxes, and your portfolio could be impacted. Click here to read more.
Kyle Colona has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!