When it comes to industries that are expected to see tremendous growth in the coming decades, arguably few have as bright a future as the health-care industry.

The passage of the Affordable Care Act in 2010 allowed for a complete transformation of the medical-care landscape that's altering the way in which we receive and pay for care, as well as the guidelines by which health-care providers and health-care service companies operate. Given the potential for a large influx of newly insured patients over time, this law could offer a number of opportunity for investors -- but it's first important to understand the inner workings of the industry.

To that end, let's have a closer look at the core of what the health-care provider and services industry is, and what its main drivers are.

What is the health-care provider and services industry?

Put simply, this industry encompasses businesses that play an important role in providing medical care. This includes insurers that you purchase health insurance from (both private insurers and those dependent on government-sponsored care), as well as pharmacy benefit management companies that process and pay prescription drug claims and act as the middleman between insurers and individual plan members. It also includes senior housing operators, hospice care providers, home-health providers, and specialized health-care service providers, such as dialysis clinics.

How big is the health-care provider and services industry?

To put into perspective just how large this industry is, we have to first comprehend that in 2012 U.S. health-care spending totaled $2.8 trillion according to the Centers for Medicare and Medicaid Services, up 3.7% from the prior year. That equates to more than $8,900 spent per person -- a figure that's only expected to rise over time. Broken down a bit further, hospital care, often paid for by insurers, accounted for $882 billion of expenses, with physician and clinical services adding another $565 billion. Home-health providers accounted for $78 billion. 

Keep in mind that these figures are prior to the full implementation of the Affordable Care Act, which will shape the rate consumers use health care services in the future.

How does the health-care provider and services industry work?

For most companies in the health-care provider and services industry their well-being revolves around consumers obtaining some form of health insurance, which can be done in two ways.

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First, consumers can obtain private health insurance through their employers or on their own. The Affordable Care Act established marketplace exchanges that allow consumers to shop for and compare insurance plans on either a state or federally run online marketplace. Consumers are also able to shop on private exchanges or obtain insurance on their own outside of the exchanges.

Consumers can also apply for Medicare or Medicaid, if they qualify, and become a government-sponsored member. Medicare is usually available to seniors aged 65 years and up, although citizens who have qualified for Social Security disability benefits for at least 24 months, for instance, are also eligible. Medicaid, on the other hand, is usually for citizens who meet low-income standards and wouldn't be able to purchase affordable health insurance otherwise.

It should still be noted, though, that individuals can still receive medical care even if they have no insurance. We'll discuss the ramifications to businesses of this occurrence in a moment. 

Health insurers provide medical care benefits to its members, paying a percentage of procedure and clinical costs and billing the patient a fixed monthly premium which is based on a number of factors. This premium can change on an annual basis, and insurers are required to submit plan proposals on a state-by-state basis to each state's Office of the Insurance Commissioner. Annual out-of-pocket costs for patients are capped depending on their type of insurance, whereas there is no cap on how much an insurer can spend on an individual patient.

In a similar fashion, long-term care-facility operators, home hospice providers, and other specialized health-service providers will bill private insurers, Medicare, or Medicaid for services rendered.

What are the primary drivers that affect health-care providers and servicers?

Now that we have a better understanding of what this industry does and how it works, let's have a closer look at the factors which influence its success.

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Perhaps no factor is more important than the insured versus uninsured rate. It's imperative that consumers sign up for health insurance and continue to pay their premiums in order for insurers and pharmacy-benefit managers to succeed. Most consumers can't afford the high costs of medical care without insurance, therefore the role that the Affordable Care Act will play in reducing the uninsured rate moving forward is only going to be magnified for this industry.

But, the ability to bill insurers is also a key component to the success of health care service providers, too. The high costs of diagnostic tests and dialysis, for instance, would be far too high for most people to pay without some form of coverage. Having insurance certainly makes it easier for health-care providers, though charitable exemptions from hospitals can provide another path by which health-care service providers can be paid.

Even if consumers are insured, the type of insurance can matter. One of the primary purposes of the Affordable Care Act, in addition to reducing the number of uninsured and spreading health-care costs across a greater swath of America, is to reduce the reliance of private businesses on government funds. The Centers for Medicare and Medicaid Services has made it evident that government-sponsored care reimbursement rates are likely to fall over the long run, which could make it difficult for health-care providers and long-term or specialized-care services companies that are reliant on government-sponsored care to thrive.

Another key figure worth watching specifically among health-care providers is their medical loss ratio, or MLR. The MLR is merely a measure of how much an insurer brings in through premiums versus how much it spends on medical care for its patients. An MLR of 100% means a company is spending exactly as much as it's bringing in on medical-related expenses -- but that it's also not making any money! But, keep in mind that the MLR strictly refers to medical costs and not other aspects of expenses such as salaries or marketing expenses. Any figure below 100% represents more premium collected than medical expenses (and thus a positive profit margin), while a figure higher than 100% would imply costs are outpacing premium collection, or a loss.

The makeup of new enrollees will also have an important impact on health-care providers and health-care servicing companies.

In years past insurers had the ability to turn away people with preexisting conditions as the costs to treat them would have been too high. The Affordable Care Act remedied this by requiring insurers accept consumers with preexisting conditions. If a number of new enrollees are higher risk that could bode poorly for health insurers since their MLR could rise -- though it could be great news for specialized health service companies which are billing back to the insurer. Health-care service providers are counting on an increase in doctor visits tied to the implementation of the Affordable Care Act, which, in turn, could boost their business over the long run.

On the flipside, if enrollees tend to be healthier, then it could result in a lower MLR for insurers since the likelihood of expensive hospitals visits is much lower, delivering a potentially lower MLR for insurers. Conversely, healthier individuals are less likely to need health-care services. 

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

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