Winners and Losers in Universal Health Care

On Monday, presidential hopeful Hillary Rodham Clinton laid out the final part of her three-pronged health-care reform platform -- improving health-care quality, reducing costs, and offering universal health care. Let's put the plan under the Foolish microscope and take a look at the companies that stand to win or lose if she is elected -- and gets the plan through Congress.

Canceling each other out
The plan requires coverage for the estimated 47 million Americans who don't have health-care coverage. Learning from her 1993 mistakes, Clinton's proposal doesn't establish a massive new bureaucracy but instead relies on current insurers to cover most Americans. The coverage would be similar to the Federal Employee Health Benefit Program (FEHBP) that provides members of Congress with choices among multiple private insurers. Those without coverage would also be eligible for a public plan similar to Medicare.

For insurers such as UnitedHealth (NYSE: UNH  ) , Aetna (NYSE: AET  ) , and WellPoint (NYSE: WLP  ) , the requirement to cover everyone might not be that bad. The companies would have to enroll some very sick people, but that loss would be offset at least partially by a herd of healthy young people who don't bother with health insurance. With the government ponying up to pay the poor's portion of health care, insurers might not be that bad off.

Plus, Clinton estimates, the companies will save $50 billion a year by not having to figure out whether or not to deny coverage to people with pre-existing conditions. While I'm sure that number is inflated and includes everything down to the lead in the actuary's pencil, the insurers will certainly save something by not having to spend time denying coverage. Dare I say it? Insurers that adjust well might actually increase profits under the Clinton's plan.

Drug companies
While the effect on health insurers might be minimal, drug companies don't appear to be so lucky. Clinton recently said, "We do have to provide more negotiation to get drug prices down and to import from Canada and other countries that are similar to ours." So much for those high gross margins that drug companies, including Pfizer (NYSE: PFE  ) and GlaxoSmithKline (NYSE: GSK  ) , currently enjoy.

Her argument goes something like this: The government funds basic research through the National Institutes of Health (NIH); pharmaceutical companies base their discoveries somewhat on that basic research, and, therefore, the drug companies should pay back Americans in the form of cheaper drugs.

While I can't fault her facts -- I've been the beneficiary of a few of those grants myself -- I think her conclusion is off. I would argue that if the government didn't fund basic research, drug companies would have to charge more for their drugs because they would have to recoup the R&D costs. While gross margins on drugs are relatively steep, net margins for the industry as a whole aren't as stellar. For every blockbuster drug Clinton can name, I can probably name 10 that died in clinical trials.

It gets worse for drugmakers that are primarily involved in developing biologics -- think Amgen and Genentech. Clinton is one of the co-sponsors of the bipartisan bill that will chart a path toward FDA approval of follow-on biologics. In a recent speech, Clinton reiterated the need to "do more to get generic drugs to market."

All is not completely lost for the drug company investor, though. A passage of the bill will be a boon to generic drugmakers. Dr. Reddy's Laboratories (NYSE: RDY  ) and Novartis (NYSE: NVS  ) seem to be farthest along with plans to expand, or with a follow-on drug already approved for sale in Europe. And other generic drugmakers will jump on the bandwagon when the U.S. market opens up, if they're not making plans already.

Change your strategy?
It's clear there will be winners and losers, but if Clinton's plan were to become law, I'm not sure if it's necessary to change your investment strategy yet. The plan has a long way to go before affecting the drugmakers. First, Clinton -- or one of the other front-running Democrats; they have similar plans -- has to win the election. Then she/he would need to push the plan through Congress.

It's tough to handicap that far in advance without knowing what the final legislation will look like. There is certainly a growing movement in the U.S. for mandated health care. Whether insurance reform will be tied to some sort of prescription drug or follow-on biologic reform, though, remains to be seen.

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