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.
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.
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.