Will Health-Care Reform Hurt Investors?

The results are in. Most Americans seem on board with reforming our health-care system, according to a recent Harris Interactive/HealthDay Poll:

  • 78% are in favor of letting Medicare and other governmental entities negotiate with pharmaceutical companies for lower prices on drugs.
  • 69% of all adults like the idea of requiring all children to be covered by insurance.
  • 60% think positively about a national health insurance exchange, where people could choose from plans offered by private insurers and others.

That's the good news -- at least for consumers.

Where's our crystal ball?
The bad news here is that there's quite a bit of uncertainty around this issue, and that some health-care-focused companies may end up suffering.

For example, as my Foolish colleague Brian Orelli recently explained, the Obama administration's health-care proposal calls for "insurers such as Humana (NYSE: HUM  ) and UnitedHealth Group (NYSE: UNH  ) to bid for Medicare Advantage members rather than use the current formula that helps the companies rake in 14% more than the cost of government-sponsored Medicare."

That may end up putting pressure on their profit margins. It could be great for American consumers, but not so great for Humana and UnitedHealth shareholders.

If drugmakers end up having to sell their wares for lower prices, their profit margins, too, will shrink:

Company

Net Profit Margin

Merck (NYSE: MRK  )

33%

Abbott Labs (NYSE: ABT  )

17%

Novartis (NYSE: NVS  )

19%

Johnson & Johnson (NYSE: JNJ  )

21%

GlaxoSmithKline (NYSE: GSK  )

19%

Data: Yahoo! Finance.

It's true that these margins are fairly generous. But with concerns about future patent expirations and thinning pipelines of new drugs, many of these companies could see margins erode even without health-care reform.

Bye-bye, $3 trillion
It's hard to envision how much of a bottom-line impact health-care reform could have on our economy, especially since the scope of reforms has yet to be decided. But that hasn't stopped some from making estimates.

The Commonwealth Fund Commission on a High Performance Health System, for instance, issued a report proposing a comprehensive set of reforms that could slow the growth in health spending by a whopping $3 trillion in a decade.

Let's ponder that for a moment. That averages out to $300 billion per year, which is more than the following companies take in annually, combined.

Company

Trailing-12-Month Revenue

Merck

$24 billion

Johnson & Johnson

$63 billion

UnitedHealth Group

$81 billion

Humana

$29 billion

Novartis

$43 billion

GlaxoSmithKline

$35 billion

Data: Yahoo! Finance.

That might make you gasp, but it shouldn't. It's not like these particular companies will get wiped out. Instead, some or many of them may simply see revenue drop. (Note that our entire health-care spending has been pegged by some to be about $2 trillion per year, with about 30% of that spent on hospitals, 21% on doctors, and about 10% on drugs.)

And don't forget about those companies that could stand to benefit from potential reforms: generic-drug makers and companies providing information technology to the health-care system, for example. And increased health coverage could lead to more drug sales, as more people would be able to afford medicines.

When assessing how developments in the push for health-care reform will affect your portfolio, it's mandatory that you put on your thinking cap. (It's up to you whether aspirin is needed.) Now is a time of great opportunity, and you shouldn't bypass researching stocks in the health-care sector out of fear about change.

The Fool owns shares of UnitedHealth Group, which is a Motley Fool Stock Advisor pick and a Motley Fool Inside Value selection. Johnson & Johnson is a Motley Fool Income Investor pick. Novartis is a Motley Fool Global Gains selection. Try any of our investing newsletters free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of Johnson & Johnson and Novartis. The Motley Fool is Fools writing for Fools.


Read/Post Comments (2) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 22, 2009, at 12:58 PM, Stephanie2045 wrote:

    Need to spend money on health education and empowerment. Safety of medications must be number one on the list. Independent Regulatory Agency and a more complex safety checks need to be in place.Merck

    and company increses your health expenses with all the adverse effects that they cause. I would not want any USA made, FDA approved drugs or vaccines. You must have 100s of thousands of people who are dying fom adverse effects.

  • Report this Comment On April 22, 2009, at 1:25 PM, Credorules wrote:

    This article falls short of estimating how likely it would be for some aspects of health care reform legislation to be approved by congress.

    Of interest would be how congress would view the impact of reduced profitability for our health care companies and their ability to sustain innovative improvements in health care.

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