Health care in the U.S. needs to be fixed. President Obama and almost all investors can probably agree with that.
But investors probably aren't nearly as excited about how the president is planning on solving things.
The good news is that Obama's budget includes a $634 billion down payment on getting insurance for the 48 million uninsured. The bad news is that the president has to pay for that by cutting costs in other areas.
Ensuring lower margins
Health insurers have taken the brunt of the pain from the budget proposal. Obama wants insurers such as Humana and UnitedHealth Group
Moats are good; competition is bad. Anyone with a basic understanding of investing knows that. A competitive bidding process will almost certainly pinch margins, although there's a possibility that lower costs could bring in more members, which would take a little bit of the sting out of the bottom line.
The health insurers aren't going to go down without a fight, though. Many of them have issued press releases condemning the cuts -- in the nicest possible way, of course -- and Cigna even went as far as releasing a podcast on the subject.
I'm not sure seniors are going to go for the change, either. The popularity of Medicare Advantage is that it can provide additional services beyond Medicare -- that's the "advantage." Cutting payments to HMOs is ultimately going to hurt seniors.
Importing lower margins
Obama is also revisiting the idea of allowing the importation of drugs from other countries. Pharmaceutical companies such as Pfizer
In theory, importing drugs could hurt drugmakers, but in reality, it shouldn't be a major problem, since pharmaceutical companies control who gets their drugs. If a Canadian pharmacy started selling drugs in the U.S. to any significant degree, the drugmakers would just cut off their supply.
The solution to keeping innovation going is to get other countries to pay their fair share, not for the U.S. to try finding a back door to cheaper drugs. But good luck with that.
Generic-drug makers weren't nearly as sad about the budget. Their margins won't be going up, but Obama's support for generic versions of biotech drugs is a boon. Finally, someone's benefiting from this budget.
Right now, generic-drug markers can sell generic versions of small-molecule drugs that are generally made through chemical synthesis after the exclusivity period runs out. But there's no regulatory pathway to approve biotech drugs that are produced by live cells.
The big fight is going to be the length of time before biotech drugs see generic competition. Currently, a small-molecule drug can get a five-year bonus added to its patent, thus extending the time before it sees generic competition, but biotech companies such as Amgen
Even if Congress sets up a regulatory pathway, companies such as Teva Pharmaceuticals
It's not over till it's over
Although health-care companies have been mostly insulated from the politics lately and haven't seen nearly as much volatility as banks such as Bank of America
Suddenly, every change to the budget -- this was just a budget proposal, after all -- is going to have monstrous effects on the sector. Take some motion-sickness medicine, Fools -- this is going to be a roller coaster.
More Foolishness on government intervention: