Prevention for Your Portfolio

Over the last few years, Medicare has figured out that an ounce of prevention is worth a pound of cure. In the hopes of paying fewer medical costs in the long run, the agency is increasing the number of screenings tests and immunizations it pays for.

Medicare has typically spent about 5% of its budget on preventative services, but as evidence has mounted that preventative services pay for themselves -- and then some -- the agency has increased the amount it spends on these services.

To get the word out about the increased spending, Medicare launched a bus tour this summer that covered 48 states and 120 cities. That sounds like an agency that's serious about spending money on prevention.

Like any good Fool, my first thought was, "This sounds like an investment idea worth investigating." Let's take a look at some of the companies that might benefit from increased spending on preventative medicine.

Immunizations
Medicare covers immunizations for pneumonia, hepatitis B, and the flu. While there's certainly some money to be made off sales of the first two, flu vaccinations are a much larger market, since a new shot is required yearly. In 2005, more than a third of those eligible didn't get their free flu vaccinations, so there's still plenty of potential for increased spending.

There are only a few flu vaccination providers left: GlaxoSmithKline (NYSE:GSK), Novartis (NYSE:NVS), and Sanofi-Aventis being the largest. Because the vaccinations have a relatively short shelf life -- most people get their vaccinations between September and December -- it's a difficult business to be in. The companies have to guess well ahead of the flu season how many vaccinations will be needed and then eat all the extras that don't get used.

One company that won't benefit from increased spending by Medicare on flu vaccinations is AstraZeneca (NYSE:AZN). Its needle-free FluMist, which it acquired when it purchased MedImmune, isn't approved for use in adults over the age of 49. AstraZeneca could run an additional clinical trial with older adults to prove that its version provides protection in that age group, but I'm not sure if Medicare would reimburse the company at the higher price it now sports.

While older adults and young children are most at risk for complications arising from the flu, most adults should also get the vaccination. Many adults suffer from the flu and miss work every year because they didn't get vaccinated. Due to the high cost of absenteeism, we may see more companies deciding that it's financially beneficial to offer free or very low-cost flu shots to their employees. That should widen the market and help newcomers, such as Baxter International, that have vaccines in the clinic.

Sweet tooth and weak heart
The costs of covering diabetes treatments and heart surgery are astronomical. To reduce its risk, Medicare pays for tests to check blood sugar levels for individuals at risk for developing diabetes and tests to check cholesterol and blood fat levels for everyone.

After the phlebotomist draws the blood, these tests are performed by laboratory testing companies across the nation. The largest of these labs, including Laboratory Corporation of America (NYSE:LH), Quest Diagnostics (NYSE:DGX), and Bio-Reference Laboratories, should see growth in the number of requisitions they process each year, thanks to growth in preventative medicine, as well as more tests being required to diagnose ailments in the aging population.

New addition
At the beginning of this year, Medicare added ultrasound screenings (for patients at risk of developing aortic aneurysms) to the list of preventative care services it covers. Aortic aneurysms are a weakening of the main artery, which can eventually rupture if it's not diagnosed.

As more patients are referred for this new service, more ultrasound machines will be required, which should help ultrasound makers such as SonoSite (NASDAQ:SONO) and General Electric (NYSE:GE) increase sales. The ultrasound can even be done in the primary care physician's office, so we may see an increase in sales directly to doctors rather than to specialty clinics.

More than just old people
As the population ages, more and more people will be covered by Medicare, so it's likely that spending on these services will continue to grow. But it's not just Medicare that has jumped on the prevention bandwagon; private insurers have also figured out that spending money on prevention results in decreased costs in the long run. Just the other day, my insurance company sent me an offer for a substantial discount for one of the weight-loss centers; clearly it understands that healthy people are cheaper to insure.

I've only touched on some of the preventative treatments paid for by Medicare. If you'd like to get more information, click here to grab a PDF booklet from Medicare that describes more of the preventative treatments the agency pays for. If you find anything interesting, be sure to share your investment ideas on the discussion boards.

GlaxoSmithKline is an Income Investor recommendation. Laboratory Corp. was recommended by our Stock Advisor newsletter. Quest Diagnostic is an Inside Value pick. SonoSite was recommended by our Rule Breakers team.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.