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.