Health-Care Reform Passes! Here's Where to Invest Now

Like it or not, health-care reform seems all but certain after the House passed the Senate's health-reform bill and a package of slight amendments to it last night. Rather than pout or gloat, depending on where you stand, let's focus on what's really important: How can Fools make money from health-care reform?

A slap on the wrist
Every aspect of the health-care industry will take a hit from the reform, but drugmakers seemed to have gotten off with nothing more than a mild headache. By getting in early and not opposing reform, they were able to keep their share of the cost to $80 billion.

In return, health care reform should add some 30 million new faces to the ranks of the insured, all of them now better able to afford medications. The biggest benefit will come for drugs that don't have an immediate effect on health, such as Merck's (NYSE: MRK  ) diabetes drug, Januvia, or cholesterol drugs like Pfizer's (NYSE: PFE  ) Lipitor or AstraZeneca's Crestor. Unlike lifesaving medicines, which may be one-time charges, it's easy for uninsured patients to justify skipping a prescription when the benefits are years away and the drugs have to be taken daily.

Lowering costs
Even if health-care reform isn't everything that proponents hoped for, the movement has certainly shed light on the need to lower costs. Companies in the business of keeping costs down will undoubtedly thrive.

I've previously highlighted pharmacy benefit managers as excellent proponents of cost reduction. Companies like Medco Health Solutions (NYSE: MHS  ) and Express Scripts lower drug costs by offering mail-order drugs, much like Amazon.com's (Nasdaq: AMZN  ) lower overhead typically helps it beat companies paying for retail space. The pharmacy benefit managers also reduce drug costs by helping businesses and health insurers set up their plans to encourage patients to use cheaper generic drugs. Medco has even gone so far as to set up its own clinical trial comparing Daiichi Sankyo's and Eli Lilly's Effient to sanofi-aventis' and Bristol-Myers Squibb's (NYSE: BMY  ) Plavix, which will become generic shortly.

Generic-drug makers like Teva Pharmaceuticals (Nasdaq: TEVA  ) and Mylan are the other clear winners in the push for lower costs. Many patients will likely switch to generics, especially as branded drugs go off-patent and more clinical trials compare the effectiveness of generic drugs against higher-priced alternatives.

Health-care reform also offers generic-drug makers the benefit of selling copycat versions of biologics, which wasn't available before now. Opening up an untapped market is certainly an advantage, but generic-drug makers will have to wait 12 years after approval before they can start competing. Also, it's unclear how strict the Food and Drug Administration will be in requiring drugmakers to prove that the copycats are similar enough, since biologics are more complex than the small-molecule drugs generic-drug makers currently make.

Adapting
At the center of health-care reform lies the health insurers like UnitedHealth Group (NYSE: UNH  ) and Aetna. They didn't get off scot-free, but it could have been worse as a subsidized public plan never made it into the bill.

As I see it, health insurers' ability to thrive at this point will depend upon how well they can adapt to the new rules that will start in 2014. Margins will undoubtedly be compressed as insurers are required to take on patients with preexisting conditions. However, they should be able to compensate with additional volume as the uninsured buy into the system.

Over the next couple of years, investors need to be careful not to gain a false sense of security. Credit card companies increased charges before new credit card regulations kicked in recently, and health insurers are likely to do the same. Profits may increase over the next few years, but 2014 will be the year that really counts.

While the regulation uncertainty is mostly over, conservative investors may want to continue to stay out of the sector until it's clear that the insurers have a firm grasp of how to deal with reform.

Did I miss any clear winners? How do you think the health-care industry will fare post-reform? Let us know in the comment box below.

Pfizer and UnitedHealth are Motley Fool Inside Value selections. Amazon.com, MedcoHealth Solutions, and UnitedHealth are Stock Advisor picks. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool owns shares of UnitedHealth and has a disclosure policy.


Read/Post Comments (19) | Recommend This Article (31)

Comments from our Foolish Readers

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 March 22, 2010, at 3:36 PM, RavenandSunny wrote:

    I was just wondering if anyone knows, or would venture to speculate on how this bill will affect Health Care REITS?

  • Report this Comment On March 22, 2010, at 4:30 PM, IIcx wrote:

    I agree with your comment, "Rather than pout or gloat, depending on where you stand, let's focus on what's really important: How can Fools make money from health-care reform?"

    The problem is, other then the knee jerk reaction we got today, it may be to soon to tell how the changes will impact stocks.

    36 states are actively passing legislation to eliminate one or more aspects of the Bill. 12 State Attorney Generals are in the process of testing the constitutionality of the Bill in the courts.

    With each press announcement related to the suits and or new state legislation, health-care insurers, Pharma, and Hospital stocks are likely to rise or fall.

    If you're on the right side of the trades, its a pretty good opportunity. The question is, which side is the right side?

    Pharma and M&As related to some of the Biotechs should do very well but insurers and health providers are likely to be inflated at this point or a very risky trade until the suits and legislation are settled.

    I like your call on generics and companies like Medco and Express Scripts if they aren't already overpriced.

  • Report this Comment On March 22, 2010, at 4:44 PM, SwampBull wrote:

    Pharmacies and retail giants may see a small pick-up in prescriptions filled, particularly in rural areas where the uninsured reside. I think CVS, Walgreens, Walmart, and public and private grocery chains with pharmacies all will get a little more traffic as a result of the insurance mandate - after all, if the gov't forces you to pay for coverage, you may as well use it.

    As to the more political question of the impact of legislation (not really addressed in the above, but why not give it a shot?) I am skeptical that the uninsured being covered will have a monumental impact on overall health care costs for the nation. Drawing on knowledge from the medical industry through a close relative in medical school, I can see the gargantuan costs of social security piling up as aging boomers live longer than the government anticipates. I am in full support of the Fool's proposal to push out the starting age for benefits as a cost saving measure.

    I also hear of the excessive procedures and treatments doctors must pursue to cover their rectums, to put it bluntly. True medical reform will require a significant reduction in the malpractice industry. Here's the catch: when Washington is composed of hundreds of lawyers, who will reform the laws in favor of the doctors? Malpractice insurance costs weigh heavily on doctors, and this ultimately drives higher insurance premiums and more expensive care. If you want to reform health care, start by removing the excessive legal burdens.

  • Report this Comment On March 22, 2010, at 4:47 PM, outoffocus wrote:

    I appreciate your opinion though it may not be well recieved by everyone. I too am curious how this bill will effect the stock market. But here is my analysis:

    - 32 million people will be added to health insurance rolls around the country

    - Since no changes were actually made the healthcare itself in this country, healthcare costs will go up exponentially.

    - With the added customers, comes higher usage of prescription drugs

    - The average American will now be forced to spend a higher portion of their (declining) take home pay on healthcare.

    - Lifetime Maximums are being removed. A boon for the cancer industry.

    Therefore I think the following types of companies will benefit from this bill: Health Insurance companies (medium to large), Pharmaceutical companies, Medical supply companies.

    Companies hurt by this bill: Small health insurance companies,

    Retail sellers of discretionary items.

    Jobs created by this bill: nurses, Specialist doctors, adminstrative professionals, lawyers.

    Jobs lost by this bill: General practioners, retail employees, and a influx of people who would have gone to other industries but will decide to enter healthcare because its the "hot" field to enter into

  • Report this Comment On March 22, 2010, at 6:57 PM, ConorLarkin wrote:

    Is anyone in the Fool universe aware of a publicly traded Medical Tourism company?

    I have to think that the opporunity for these companies grows as governments take greater control of what you can and can't get locally when it comes to treatment.

  • Report this Comment On March 22, 2010, at 8:44 PM, poppix920 wrote:

    I am a physician and to me, the single worst problem I see now is the lack of primary care. All-specialist care does not lower mortality rates and it is more expensive by far. So many diseases are very simple to keep under control (COPD, hypertension, asthma and diabetes for examples) but when out of control, they are monstrosities. A few pennies a day for blood pressure control-or spend thousands a month for nursing home care for stroke victims, take your choice. We have an upside-down health care system, run amok by malpractice effects that have totally changed even medical education--just sent the patient to lab and X-ray no matter what the problem is, and besides, hospitals love it and all these tests are now the so-called "Standard of Care". And for God's sakes, outlaw the drug ads on TV. If we have to, subsidize the drugs people simply cannot ignore, like the asthma inhalers like Advair that are $240 even at Walmart or $40 from a Canadian Pharmacy. And on and on, but enough for now. That alone is enough to save half the current bill. Smoking and obesity are next to conquer.

    John Ellis, MD, Gainesville, VA

  • Report this Comment On March 22, 2010, at 9:06 PM, IIcx wrote:

    Brian,

    This occurred to me as I was commenting on a different blog. Americans can get pretty aggressive when government pushes us to the wall so this may not be far-fetched. If it occurs, I wouldn't want to be holding stock in an insurer.

    The Health Maintenance Organization Act of 1973 required employers with 25 or more employees to offer federally certified HMO options. Unlike traditional indemnity insurance, an HMO covers only care rendered by those doctors and other professionals who have agreed to treat patients in accordance with the HMO's guidelines and restrictions in exchange for a steady stream of customers. (from Wikipedia)

    Just a thought, why can't residents and Physicians in each State band together and create a State Mutual Insurance Company that provides insurance to members substantially at cost by cutting the profit out of the issuer and eliminating government intervention? It seems like this could already be in place in some states?

    Mutual Insurance Companies or Associations

    501(c)17 Not for profit - providing insurance to members substantially at cost.

    A Mutual insurance company is an insurance company which has no shareholders but instead is owned entirely by its policyholders. In a mutual insurance company, any distributed surplus funds are paid entirely to policyholders.

  • Report this Comment On March 22, 2010, at 9:47 PM, SUPERMANSTOCKS wrote:

    Now that Obamacare has passed, we invest in a new batch of Politicians and get rid of the current establishment!

  • Report this Comment On March 22, 2010, at 11:59 PM, domambaman wrote:

    Dr. John Ellis, thank you so much for your outstanding insights, and taking the time to share with us and not ramble on and on. I know I speak on behalf of many other Fool members in sharing my appreciation and gratitude!

    Best Regards,

    Tom Race

  • Report this Comment On March 23, 2010, at 1:16 AM, imntacrook wrote:

    How about Smith & Wesson? And I'm not kidding.

  • Report this Comment On March 23, 2010, at 7:38 AM, kristoferobin99 wrote:

    Well put Dr. Ellis

  • Report this Comment On March 23, 2010, at 7:50 AM, plange01 wrote:

    with obamas ridiculous healthcare plan in effect until he can be removed from office reits specializing in renting to unemployment and welfare offices is a great spot to invest..

  • Report this Comment On March 26, 2010, at 12:15 PM, stratman2k wrote:

    Dr. Ellis thank you for your insight and service to your community.

    Another thought, one of the foci of this bill is Healthcare Information Services. Who are going to be the big players here? I know that PositiveID is there, anyone have some other runners?

  • Report this Comment On March 26, 2010, at 12:15 PM, stratman2k wrote:

    Dr. Ellis thank you for your insight and service to your community.

    Another thought, one of the foci of this bill is Healthcare Information Services. Who are going to be the big players here? I know that PositiveID is there, anyone have some other runners?

  • Report this Comment On March 26, 2010, at 12:24 PM, MyBoyAndy wrote:

    The recommended stocks have pretty lofty multiples (Teva, Express Scripts, Medco avg a p/e of about 30). Yes they are winners but their prices (more than?) reflect a VERY rosy outlook. Are there any reasonably priced potential winners?

  • Report this Comment On March 29, 2010, at 2:20 PM, aleax wrote:

    A likely incentive-based side effect, throughout the economy, that has been little noticed (I've seen a few mentions somewhere): once the new law's all-in, it substantially reduces the catastrophe risks that come with the prospect of leaving "safe" employment (middle-management and professional jobs in large-ish, sound firms) to found a start-up or become a freelance, especially for anybody with preexisting conditions (or with a dependent with such conditions).

    This could be moderately disruptive to large, sluggish firms (they may lose some of their best personnel, who were keeping their jobs to avoid losing health coverage -- or may have to offer more stock options &c to retain such personnel), but stimulative to the economy as a whole by encouraging more startups and freelancing.

    I don't know how to play this hunch in the stock market, though -- we're talking about effects that will hardly start before 2014-2015, after all. Maybe go long (taking advantage of overall dips that will certainly occur in these next few years) on strong companies which offer services to small business that are typically in-house in large businesses, such as PAYX for payroll and HR services, or HRB for tax and accounting. Any suggestions (including other good firms in such fields)? How would YOU play a hunch that many more startups and freelance operations will come into being 5 years from now?

  • Report this Comment On April 01, 2010, at 1:59 PM, tomaun wrote:

    I would like to know why so many of the big compines that currently offer health care to all emploies are takeing big write offs for health care, what gives.

    tomaun

  • Report this Comment On April 01, 2010, at 2:04 PM, tomaun wrote:

    Thank you Dr. Ellis we need to hear from more doctors like you in primary care and private practice.

  • Report this Comment On April 11, 2010, at 8:30 PM, SwampBull wrote:

    Dr. Ellis hit the bull's eye here. Top three reasons we are going to continue to have a health-care nightmare in the US:

    1) Ludicrously high malpractice insurance bought by the doctor and paid through higher fees by the consumer.

    2) Unnecessary treatments prescribed to avoid the malpractice suits covered by (1).

    3) Unnecessary pills swallowed by the consumer because they saw an ad on TV.

    I have a family member in med school - these problems are real! Headaches don't warrant CT scans people! Stop suing your doctor when the outcome is hard to bear - the pain of a tragic loss or a disappointing result cannot be assuaged by the legal system. If you have been legitimately harmed due to negligence, fine. Just know that every time a doctor is brought to court, it adds a little more to everyone's health insurance premiums. If you want to raise your health expenses, keep calling up the lawyers on TV.

    -Swamp

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