By Dan Caplinger and Ryan Katon
The Affordable Care Act has been one of the most controversial pieces of legislation of the past several decades. Proponents point to the legislation, now colloquially known as Obamacare, as a hallmark of support for a basic human right for all Americans. Opponents see Obamacare as an unwelcome intrusion into the private health insurance market and an abridgment of basic American freedom. Those two groups have caused a huge debate over Obamacare, and it's not likely to get resolved any time soon.
But one thing that everyone can agree on is that no matter what you think about Obamacare, it's going to have a widespread impact on you in many different ways. As a consumer of health care, you'll see the changes Obamacare will make in the way you get the medical care you need, as well as the way you get insurance coverage for your health care and how much you pay for it. As a taxpayer, you'll face the challenge of coming up with your share of the burden of paying for the overall cost of Obamacare. And as an investor, you'll find that many stocks both inside and outside the health-care sector will have their businesses transformed by the legislation.
In this special report, we'll focus on each of these three areas, giving you the insight you need to deal with and even potentially profit from Obamacare. By moving past the rhetoric and sticking with facts, you'll be in a better position to make objective, unemotional decisions to put yourself in the best position to use Obamacare to your advantage as thoroughly as possible. But first...
Let me (Ryan) share an example with you that should help you understand Obamacare a little better:
Imagine you sold lemonade for $2 at a stand in your front yard.
Let's say 100 people walk by your stand each day. And of those people, 50 choose to buy... 25 people don't... and 25 people would be interested but could only afford a cup for $1.
Then, one day, the government passes a law that requires everyone to buy lemonade. For your 50 existing customers, they'd continue to pay you the $2 a cup they've always paid. In addition, though, you'd capture $2 a cup from the 25 people who didn't want lemonade but now have to buy it. And for the 25 who couldn't afford it, the government would pay you to offer lemonade at $1.
In other words, the government would be giving you more customers and paying you at the same time. A pretty attractive deal when you consider that your business would've grown its revenues 100% practically overnight. And that a simple piece of legislation would've made you — and your investors — a heap of cash.
Now to be fair, Obamacare doesn't really work like this. For one thing, the government has high hopes that the program will lead to lower costs for health insurance — to carry the lemonade analogy further, the law would set limits on your ability to charge more than your actual expenses plus a reasonable profit rather than letting you keep selling at $2. Moreover, while Obamacare's individual mandate calls for everyone to have insurance, people still have the alternative of not getting coverage and paying penalties instead.
Still, the likelihood is that many more people will buy insurance than before, and that could lead to big gains both for the companies that provide that insurance and the hospitals and other medical providers who serve newly insured patients.
All that explains why we've already seen numerous health-care stocks return as much as 71.0%, 124.3%, and even 130.0% since the bill passed. Not only are they likely to benefit from huge numbers of new customers; they're also going to reap profits from government subsidies as well — and that means a never-before-seen profit opportunity for investors like you and me...
These landmark changes don't happen often. But when they do, you need to be ready (and well informed!) if you want a piece of the profits. So stick with us and pay close attention to what Dan has to say about Obamacare's provisions... Then later, I'll be back to give you the inside track on Obamacare's winning investment formula.
Obamacare's provisions promise that everyone will have individual health insurance, and the individual mandate within the legislation requires everyone to have that coverage or face potential penalties. Yet millions of Americans are worried about what their insurance policies will look like after Obamacare fully takes effect and whether the coverage those policies will provide will be better than what many of them already have.
Not all of the details have been fleshed out yet. But early signs point to a few likely things you'll see from your health insurance when Obamacare's provisions take full effect.
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One likely outcome of the Affordable Care Act is that the vast majority of individual health insurance plans — as opposed to group plans that employers provide — will have to provide more comprehensive coverage than they do currently. A 2012 study from researchers at The University of Chicago found that among the roughly 14 million Americans who have individual health coverage rather than group coverage through an employer or other organization, more than half of those plans didn't provide enough benefits to qualify under Obamacare's standards.
Under Obamacare, those substandard plans will be replaced by newer coverage. Some preliminary figures from state health insurance exchanges show that in many states, that new coverage is coming with higher premiums, especially for those plans that provided much more limited benefits than will be required under the new law. Whether better benefits will provide enough of an offset to result in lower overall costs will vary from person to person and across different policies. People who have minimal health expenses will likely end up paying more overall, while those who use their health benefits more often could see cost savings under Obamacare plans.
The same study also examined people covered under group plans, typically through their employer. The differences in quality were staggering. The study authors divided different insurance policies into tiers based on how much of a patient's medical bills each policy would cover. In group plans, almost two-thirds of members had policies that covered 80% or more of their costs, compared to just 2% of those who had to get their coverage individually. Moreover, thanks to employer contributions, those in group plans paid less than half what individual-plan members paid in out-of-pocket costs.
As a result, most people covered by their employers would probably prefer to keep their existing coverage. But many workers are afraid that employers might choose to discontinue offering health insurance of their own, deciding instead to let Obamacare's other provisions take care of their workers.
Despite fears of widespread employer abandonment of group health-insurance coverage, the 2012 National Survey of Employer-Sponsored Health Plans from HR consulting firm Mercer found that very few employers plan to cancel their health insurance benefits after Obamacare takes full effect. But smaller employers were much more likely to say they would cut coverage — with 16% of employers with fewer than 500 employees planning health plan cuts compared to just 6% of employers with 500 or more workers.
For many, the decision may well hinge on what the individual and small-business health insurance exchanges under Obamacare end up looking like. States have the choice to run their own exchanges, but if they don't, the federal government will have exchanges to cover their residents. Many states have already released some details about their exchanges, although others are still pending. With open enrollment in the exchanges still scheduled for Oct. 1, 2013, it should be much clearer soon whether it will make sense for employers to drop coverage even in the face of penalties for some businesses that drop their plans, as well as the loss of tax credits that some eligible businesses will get for providing coverage.
Unfortunately, there's still a lot up in the air about how Obamacare will work, especially as some states are still figuring out what they will offer their citizens under the law. Clearly, some people will get far better health insurance coverage under Obamacare than they do now. But some people will also end up paying more than they do now for coverage they'd be just as happy to keep if they could.
As much as Obamacare will affect your medical care and your health insurance coverage, the effects don't stop there. The legislation also made major changes to the tax laws — with ramifications not just for this year but extending well into the future.
Lawmakers embedded several different tax provisions into the broader Obamacare legislation. Those changes will have an impact on taxpayers at all income levels.
Perhaps the biggest change in the law expanded the tax that workers currently pay for Medicare to cover both higher amounts and different types of income. Until this year, workers paid 1.45% of their wages in Medicare withholding taxes, with employers paying another 1.45% out of their own pockets. Self-employed individuals paid the combined 2.9% on their own. Although the amount of wages subject to Medicare tax used to be limited in the same way as Social Security withholding, that changed in 1991, and by 1994, the limits on wages subject to Medicare taxation were removed entirely.
Going forward, though, Obamacare imposes additional Medicare taxes on certain individuals. In particular, two groups will be affected:
The net effect on high-income earners will be to bring total top tax brackets to 43.4% — the 39.6% regular tax amount plus the 3.8% Medicare tax.
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Those who earn less than these $200,000 and $250,000 thresholds shouldn't assume that their taxes will be unaffected by Obamacare. New limitations on flexible spending arrangements have hit taxpayers of all income levels, limiting the amount you can set aside tax-free in a flex plan to $2,500 per year. Previously, there was no technical upper limit, although most employers imposed a $5,000 maximum. But for those who have high levels of predictable medical expenses, the forced reduction in flex-plan use could cost you hundreds of dollars in extra income, Social Security withholding, and Medicare withholding taxes.
Moreover, those who rely on deducting medical expenses won't be able to get as big a tax benefit from them. Obamacare raised the floor on itemized medical expenses from 7.5% of gross income to 10%. That may not sound like much, but it could reduce your deduction by thousands of dollars and thereby increase your tax bill substantially.
The question, of course, is whether Obamacare's benefit will exceed the extra taxes you'll pay. The jury's still out on that question, but some have watched the way that health insurance and hospital stocks have reacted to Obamacare and have concluded that much of the benefit will go to industry players rather than to individuals. For newly covered individuals, the fact that they'll have coverage at all may be the only benefit they'll get from Obamacare, with higher taxes simply being part of the price we all pay for it.
Regardless, as you consider your taxes this year, don't forget about the new Obamacare provisions. Planning for them now could save you from a big headache down the road.
Beyond the effects that the Affordable Care Act will have on your personal finances, Obamacare has already had a big impact on companies throughout the health-care industry. Let's take a look at the winners and losers in this space... and how you can leverage the new legislation for your own personal gain!
Obamacare is a mixed bag for pharmaceutical companies. The law requires companies to provide larger rebates to Medicaid, which could cost as much as $20 billion over the next decade. In addition, excise taxes and coverage for the portion of drug costs that Medicare previously didn't cover -- known colloquially as the "doughnut hole" — will cost the industry tens of billions of dollars in the next 10 years.
Still, the news isn't all bad for drug companies. So far, they've retained most of their pricing power for their drugs and avoided what could have been costly measures like allowing importation of drugs from lower-cost countries. Moreover, if greater numbers of covered Americans lead to more pharmaceutical use, the profits could offset the costs.
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Medical-device makers will take the biggest hit from Obamacare, thanks to the 2.3% excise tax on their device sales. Given that the tax is imposed on revenue rather than profits, the provision will act as a barrier to entry to new players in the industry, even as big players pay the bulk of the tax.
Industry giants Medtronic and Stryker have already seen the impact of Obamacare and will continue to deal with headwinds to their business. But the worst hit will come from currently unprofitable companies like MAKO Surgical, which can hardly afford to deal with bigger losses stemming from the tax.
Obamacare will have collateral impacts on many other industries with ties to health care. Pharmacy benefit manager Express Scripts and its peers should gain from the need for health insurance exchanges and private insurers to control costs. Companies that focus on electronic health records, including Cerner and Quality Systems, should also get a lot more business as it becomes increasingly important for various parties to be able to exchange information efficiently.
On one level, it seems like common sense: If health care is required by the government, the companies that provide the service will benefit the most. Yet because Obamacare limits insurers' profits and requires them to spend 80% of premium revenue on health-care services, it could squeeze potential margins. Moreover, the policies that they'll be required to offer are in many cases of higher quality than their current offerings, and it's uncertain whether they'll be able to charge enough in premiums to offset the added costs from those better policies. Similarly, hospitals could see more patients covered by insurance, avoiding the big losses they incur when they're required to provide medical care for the uninsured.
That’s true, of course, but it’s leaving out one crucial piece of the puzzle... and I (Dan) want to let Ryan explain his view of the true Obamacare opportunity and share a unique way for you to profit from it...
I (Ryan) think a key motivator for this bill’s passage was its impact on low-income individuals... specifically, those who don't currently qualify for Medicaid programs... and make up one of the largest segments of uninsured Americans. Under Obamacare, many states will expand their Medicaid eligibility, allowing these low-income individuals to enroll at a price they can afford.
This presents a huge opportunity for certain health-care companies that have a big presence in the Medicaid insurance segment. These insurers will have pricing power and leverage with government regulators in establishing important provisions like reimbursement rates for Medicare and Medicaid.
Just like the lemonade stand example I discussed earlier, these companies already have an existing customer base. But if they receive government-funded Medicaid contracts, they would gain potentially massive numbers of new customers that could grow their businesses substantially.
These select health-care providers (and their investors) stand to make a killing. But how should YOU invest?
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This health-care provider is one of the largest in the country. AND it has the inside track on lucrative Medicaid contracts... making me think it is one of your best Obamacare investment options.
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