Article by Investment U
Hospitals, biotech, and pharmaceutical companies are set to profit from Obamacare big-time within the coming years.
I was bleary eyed as the line I was standing in snaked halfway across JFK International Airport. I had just gotten off my eight-hour flight from Stockholm when in the distance I saw a TV tuned to CNN. The sound was off and I could barely make out the graphics, but I thought it said something about the Supreme Court ruling on the Affordable Care Act.
I tried to look up the info on my phone, but got yelled at by a customs officer. For some reason, you’re not allowed to use your phone while waiting in line. I wanted to protest, but I thought better of getting into an argument with a customs officer. Cavity searches are not my bag, baby!
Eventually, I was close enough to the TV to make out the graphics that the Supreme Court upheld the President’s healthcare reform law. I had no idea how the market or healthcare stocks were reacting. And I wasn’t going to risk another altercation with Big Bertha (the name I secretly gave the customs officer).
Once I finally cleared customs, I tried to log on to the internet on my phone, but the airport’s Boingo Wi-Fi service jammed it. I finally got hold of a hedge fund manager friend of mine in California who gave me the details.
I barely had time to digest the information when I had to get on another flight down to Florida.
But now that a few days have passed, I’ve had time to go through the news, see how stocks have reacted and analyze the situation…
I expect the biggest winners to be hospitals, because of the likelihood of higher reimbursement rates.
More patients with insurance means fewer indigent and Medicaid patients. The patients who enjoy a weeklong hospital stay and then never pay a dime are the reason it costs you and me $60 for a Tylenol. Additionally, private insurance typically pays a much higher rate than Medicaid, so those dollars should flow right to the hospitals’ bottom lines. A hospital’s cost is basically the same (except for perhaps some administrative costs) whether they’re treating a patient with great insurance or none at all.
In fact, one hospital stock that I recommended in my FirstLine Investor Alert took off after the ruling. The company, which I’m recommending in today’s Investment U Plus, owns 70 hospitals in 15 states and saw its stock price jump roughly 15% since the news came out.
There’s some skepticism on Wall Street about the Medicaid insurers like Molina Healthcare (NYSE: MOH), because the Court ruled that states could opt out of the Medicaid expansion that’s part of the law.
Under the Affordable Care Act, individuals who make less than $19,157 per year or a family of four who makes below $30,656 are eligible for Medicaid. The Federal government will pick up the full tab from 2014 to 2016. After that, states will be responsible for up to 10% of the cost.
Some states, primarily those with outspoken Republican governors, have said they will not participate in the Medicaid expansion, because it’ll cost the states too much money in the long run.
Even if that occurs, the Medicaid insurers won’t be negatively impacted. They simply won’t get the benefit of the expansion. Nothing is being taken away, it just won’t get added.
Pharmaceutical and biotech companies should also benefit as 33 million more insured patients means more customers buying drugs. Bristol-Myers Squibb (NYSE: BMY) has been my favorite large pharma for a long time and is part of The Ultimate Income Letter’s Perpetual Income Portfolio. Bristol currently has a yield of 3.9% and has some exciting and promising new drugs including Yervoy, the first drug ever to show a benefit for patients with metastatic melanoma.
Biotech companies also benefitted from the ruling as the law includes a 12-year period of marketing exclusivity for biologics.
One of the few groups in healthcare that won’t see much of a benefit is the medical device industry. There may be a small uptick in patients, but the typical user of a medical device is over 65 and thus already on Medicare. Additionally, medical device companies are now required to pay a 2.3% tax starting next year.
Love it or hate it, the Affordable Care Act is likely here to stay. Even if Mitt Romney wins in November, it’s unlikely that Republicans will take enough seats in the Senate to overturn the law.
So if you want to insure that your portfolio is healthy, start looking at some hospital, pharmaceutical and biotech companies to hold for the long term. The new law will impact top and bottom lines of these companies for years to come.
Good Investing,
Marc Lichtenfeld
Article by Investment U