Obamacare's $620 Billion Boom

Americans are about to spend a lot more money on health care.

Actuaries from the Centers for Medicare and Medicaid Services, or CMS, recently published the results from their analysis of the nation's health-care spending. They predict that spending growth, which should come in around 4% this year, will jump to 6.1% in 2014 and average a little higher than that annually over the next decade.

There are multiple drivers behind this growth in health-care spending, including an improving economy and aging baby boomers. What about the Affordable Care Act, commonly known as Obamacare? The actuarial analysis estimates that the legislation will increase spending by more than $620 billion through 2022.

The bright side
Why will Obamacare boost overall spending so much? The CMS actuaries project that 11 million Americans will gain health coverage through the Obamacare exchanges in 2014, with up to 30 million previously uninsured individuals obtaining insurance by 2022. Their medical spending will drive Medicaid spending up by 12.2% and private health insurance spending up by 7.7% next year.

The good news is that more Americans will have access to health care services other than emergency care. From an economic perspective, increased spending should have a positive impact on the health care industry, an important point that we'll discuss in more detail later. And, although spending levels will be higher than in recent years, they should be lower than historical growth rates.

Also, the spending increases aren't as much as they could have been. Medicaid costs will grow at a slower pace than previous projections due to the Supreme Court decision last year that allows states to opt out of expansion initially required by Obamacare. Additionally, total spending will be less as a result of the 2% cuts in Medicare that were part of the bi-partisan sequestration agreement.

On the other hand
The bottom line, though, is that spending will go up by a large amount. While a spending growth increase from 4% in 2013 to 6.1% in 2014 at first glance only seems like a small couple of percentage points, that's actually more than a 50% relative jump.

In response to the report, CMS Administrator Marilyn Tavenner said, "We are on the right track to controlling health care costs, thanks in part to the Affordable Care Act." The CMS actuaries, however, stated that Obamacare would cause total costs to increase rather than decrease because of new entrants to the health-care market resulting from the law. 

The actuaries also noted that there doesn't appear to be any fundamental change causing health-care spending to slow down. Their conclusion was that recent lower spending growth stemmed from the deep recession that began in late 2007 and the subsequent weak recovery. Any positive effects of these factors on health-care spending will only be temporary. As for Obamacare, the actuaries expect the law to only achieve relatively "modest" savings.

Benefiting from the boom
Billions upon billions of new spending means that some organizations will be on the receiving end of all that money. Which stocks could benefit the most?

Team Health Holdings (NYSE: TMH  ) looks to be one company that could profit from increased clinical and hospital spending. The company provides outsourced staffing, including health-care professionals and administrative services workers, to hospitals and other health-care providers. Analysts are quite bullish about Team Health, with an average one-year price target reflecting a 25% upside potential from the current share price. 

Cerner (NASDAQ: CERN  ) should also reap benefits from more money flowing to clinics and hospitals. The health information technology company provides systems for providers across the health-care spectrum. Cerner was a big winner from previous regulatory changes, especially the HITECH Act that provided financial incentives for health-care organizations to implement electronic health record systems. Shares have more than tripled over the last five years.

Several biotech and pharmaceutical companies seem likely to be rewarded as prescription drug spending grows. Gilead Sciences (NASDAQ: GILD  ) should be one of them. The biotech's drugs dominate the HIV/AIDS market. Gilead's new all-oral hepatitis-C drug combo appears poised to quickly become a major blockbuster if approved later this year.

Patients will need to buy those medications somewhere. And the demand to control rising prescription drug costs should also grow. I expect that CVS Caremark (NYSE: CVS  ) could capitalize on both. The company is the nation's second-largest pharmacy chain and the second-largest pharmacy benefits manager to boot. CVS is also valued more attractively right now compared to other major pharmacy chains.

Like it or not, the big boom in health-care spending is on its way. Investors can either watch as it passes by or experience a bit of the boom for themselves.

Other booming stock ideas
Obamacare is rewriting the rules for the health care industry, and in the process of doing so, it's creating massive opportunities for investors to profit. How? By investing in a handful of specific health care stocks. In this free report, our analysts walk you through these opportunities and the companies that are positioned to exploit them. The informational edge contained in it is invaluable, but can only be exploited profitably while the rest of the market remains in the dark. To access this free report instantly, simply click here now.


Read/Post Comments (18) | Recommend This Article (3)

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 September 26, 2013, at 1:16 PM, tbarbar90 wrote:

    increase spending by more than $620 billion through 2022...eight years, average of almost $80 BILLION per year increase...

    Over 0.5% of our national GDP for one bill. That is the increase, not total spending on health care.

    That should put in perspective how HUGE of a bill this is....Affordable Care Act...Gotta love the name. Only politicians can call something like this affordable.

  • Report this Comment On September 26, 2013, at 1:20 PM, TMFHousel wrote:

    <<They predict that spending growth, which should come in around 4% this year, will jump to 6.1% in 2014>>

    Important to point out that both are some of the lowest growth rates in 50 years.

    http://g.foolcdn.com/img/editorial/HCGrowth.png

  • Report this Comment On September 26, 2013, at 1:46 PM, pondee619 wrote:

    By whom is the increase in medical spending being made and from where is it coming: what part of the economy will lose that increase in medical spending?

  • Report this Comment On September 26, 2013, at 1:51 PM, JimWherry1 wrote:

    PROBLEM: money that uninsured families would have used for gasoline, food, clothing, and housing will now be diverted to healthcare, as they purchase health insurance, for the first time. For healthy persons, that's a waste, and they are merely subsidizing the unhealthy.

    What it means for "Us Fools" is that you're about to see SUBSTANTIAL losses in the consumer industries where the monies were previously spent.

  • Report this Comment On September 26, 2013, at 1:52 PM, JimWherry1 wrote:

    Medical doctors will pocket more money, as more people have insurance that pays the bills. There is NO mechanism in place to lower healthcare costs: NONE.

  • Report this Comment On September 26, 2013, at 1:56 PM, jondaly wrote:

    i thought this was going to SAVE us money and help reduce the deficit. or maybe that was just a lie.

  • Report this Comment On September 26, 2013, at 2:04 PM, TMFDiogenes wrote:

    Yeah, total spending is up but that's because more people are getting health care. No surprise.

    Cost growth rates have fallen to record lows. That's the metric you'd want to use to measure affordability.

    Maybe it's a coincidence, but it's hard to say Obamacare is driving cost growth way up when cost growth is at record lows.

  • Report this Comment On September 26, 2013, at 3:01 PM, Mathman6577 wrote:

    In general it's a bad thing to have the government take money out of the private economy and control such a large part of the overall GDP no matter what the growth rates are.

  • Report this Comment On September 26, 2013, at 3:25 PM, doco177 wrote:

    Google "Obamacare Flowchart" at Intellectual Takeout to see a visual representation of the convoluted, corrupt mess this really is

    Congress,Muslims, Amish, Native Americans are exempt from mandate and penalties under Obamacare that the rest of us have to pay.

    1. Millions are losing the insurance Obama promised they could keep. Because ObamaCare forces employers to offer expensive Cadillac plans but also offers the option of paying a fine for not providing health insurance that can be cheaper than providing it, between seven and twenty million Americans are likely to lose their health insurance coverage according to the Congressional Budget Office. The original estimate was closer to four million.

    2. The cost of healthcare premiums is about to further skyrocket. Premium costs have already exploded, but that is a slow-motion explosion. In the near future, we could see costs double or worse. Naturally, these costs will hit an already burdened middle class hardest.

    3. Lost jobs. Lost jobs.

    The Federal Reserve's March beige book on economic activity noted that businesses "cited the unknown effects of the Affordable Care Act as reasons for planned layoffs and reluctance to hire more staff."

    Consulting firm Adecco found that half of the small businesses it surveyed in January either plan to cut their workforce, not hire new workers, or shift to part-time or temporary help because of ObamaCare.

    4. Doctor shortages that will mean rationing: The healthcare industry is already a bureaucratic quagmire. ObamaCare is about to add steroids. As the profession becomes tyrannized by government, the talented people currently practicing medicine plan to get out sooner than expected. Who knows how many will choose not to get in. Doctor shortages are what lead to the nightmare known as rationed care.

    5. Somewhere around $800 billion in tax increases will hit America's middle class. This added burden will not only further oppress a middle class already reeling from a drop in wages over the last few years, but could damage the overall economy.

    6. Inflation, the cruelest tax on the poor. When businesses get socked with added costs brought about by higher taxes and burdensome government mandates, they pass those cost along to the consumer in the form of higher prices.

    7. Added bureaucracy. Even those Obama lapdogs over at the Washington Post's Wonk Blog are admitting that applying for health care is about to get more burdensome than the byzantine paperwork involved in buying a home.

    8. To cut costs or to avoid having to provide insurance, workers on the economic margins are already losing hours, which means a lower paycheck. There are a million sad stories in ObamaVille; here are just a few of them.

    9. ObamaCare is projected to add $6.2 TRILLION to a deficit the GAO has already declared "unsustainable." That's "trillion" with a "t".

    10. More taxes than currently estimated are likely to hit because of situations like this one.

    Three years ago, Obama, Democrats, and his media lied to us about cutting the cost of health care, being able to keep our insurance, and not taxing the middle class. Today, those lies and what ObamaCare is and will do to the working and middle class are the biggest untold story in America.

    The govt becoming more involved in health care is the reason the costs have increased. So Govt creates a crisis, then provides a solution that comes at the expense of liberty and freedom, costs trillions, and by most accounts won't solve the problem but in fact make it far worse.Corruption, incompetence, disregard of the Constitution, and lying are integral to the way that this country is being run.

    REFUSE and Repeal Obamacare...If only a mere 20% of the over 300 million population of the USA boycott Obamacare the government would be overwhelmed to even think they could penalize or mandate every citizen that refused to participate in the most corrupt and unlawful ways which it was passed that circumvented the constitution of the United States

  • Report this Comment On September 26, 2013, at 3:34 PM, TMFHousel wrote:

    <<There is NO mechanism in place to lower healthcare costs: NONE.>>

    http://en.wikipedia.org/wiki/Independent_Payment_Advisory_Bo...

    You may disagree with it, but there are indeed mechanisms in place.

  • Report this Comment On September 26, 2013, at 3:48 PM, redneckrider wrote:

    Huh, so the affordable care act is just that? An act and not affordable? Tell me it isn't so ...?

  • Report this Comment On September 26, 2013, at 5:51 PM, davidxxx wrote:

    Hillary 2016 Yea!!!

  • Report this Comment On September 26, 2013, at 6:29 PM, TMFJCar wrote:

    @ JimWherry1

    <<PROBLEM: money that uninsured families would have used for gasoline, food, clothing, and housing will now be diverted to healthcare, as they purchase health insurance, for the first time. For healthy persons, that's a waste, and they are merely subsidizing the unhealthy.>>

    Healthy people have accidents. Matter of fact, the largest cause of bankruptcy is medical bills (60%). That is profit/revenue that businesses have to make up by charging more for all those items you mentioned (including everybody else's healthcare, btw).

    @doco177,

    We get it, you copy and paste that same post under every article that mentions Obamacare. I hope you are being paid for it. If not, an actual new and personalized comment would carry more weight.

    @TMFFishBiz,

    Thanks for the insightful article. What real investors want to know is how can we profit from (any) change--regardless of how we feel about it. That's real investing!

    TMFJCar

  • Report this Comment On September 26, 2013, at 8:43 PM, CrazyDocAl wrote:

    I don't see this as good news for investors. A diversified portfolio is your best strategy for a healthy future. That will be threatened by the distribution of 2/3 of a trillion dollars from one part of the economy to another. The smart investor will need to stay on their toes to avoid loosing money as companies fold.

  • Report this Comment On September 27, 2013, at 11:38 AM, TMFHousel wrote:

    Also, keep in mind that over the next decade the economy will likely produce close to $200 trillion in economic output, so $620 billion over a decade amounts to 0.3% of the economy. Talk of "bankrupting our country" is mildly absurd.

    Remember what Daniel Kahneman says: "Human beings cannot comprehend very large or very small numbers. It would be useful for us to acknowledge that fact."

  • Report this Comment On September 27, 2013, at 12:34 PM, Mathman6577 wrote:

    It's a slow bankruptcy that drains productivity by transferring money from one group of people to another. It's never worked in history.

    I know that my healthcare premiums will rise by 8 to 10% and deductible/out of pocket max will go up by 25% next year. That's money that could have been better spent investing in innovative companies that actually contribute to society.

  • Report this Comment On September 28, 2013, at 10:36 AM, TMFJCar wrote:

    @Mathman6577

    Your comment is broad, but if you mean a more socialized healthcare system, I think many people would use Germany's healthcare system to rebuff your claims (there are others).

    Also, sorry about your healthcare going up, but I'd caution against tying that to the ACA. Healthcare costs go up, it has nearly every year for the last 30-40 years. It happens. However, under the ACA there are people that will see their deductibles fall. If you are covered by your employer, it may be cheaper to shop your state's exchanges--competition lowers costs (or it is supposed to).

    Finally, you shouldn't make broad and sweeping generalizations on your personal experiences. That is a form of bias and here at Motley Fool we try to eliminate biases to find the investing angle.

  • Report this Comment On September 29, 2013, at 3:05 PM, Mathman6577 wrote:

    I didn't imply my increases were due to ACA did I? [However, until ACA came along my increases were more modest, in the range of 3 or 4 % per year over the years. Coincidence? ]

    The point I was trying to make is that increases in healthcare costs take away funds better used for investing. Anything that can potentially increase such costs, like the ACA, is not a good thing. If you and your fellow writers think taking $60 billion a year out of the economy is a good thing I respectively disagree. Soon, a larger number will be considered "nothing ".

    And I did price premiums though the exchanges ---it is about 2x my present cost.

    BTW I have seen plenty of individual experiences, generalizations, and biases (including political opinions) in stories here. I would be careful about making general statements yourself.

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