The current debate over healthcare reform has become one of great debates of our time. Its effects will be far reaching, and strong opinions on the matter are commonplace, both in D.C. and in living rooms across America.
Facing an uphill battle for the passage of a comprehensive overhaul of the healthcare system, the Obama Administration has recently been backing away from the strong template of legislation expected when he first took office in January.
Amidst the constant changes and resulting confusion, many investors have avoided the healthcare sector in its entirety. But does this strategy of omission leave potential opportunities on the table? We'll look at the different forms that healthcare legislation could take, and what they could mean for the major industries within healthcare, such as health insurers, branded pharmaceuticals, biotechs, generic drugs, diagnostics and technology systems. (Find out how to get involved in the health industry, read Investing In The Healthcare Sector.)
If comprehensive, strong legislation passes:
This option involves creating a single-payer system in America, designed around a government-run health insurer that would accept every American currently uninsured, or not happy with their current healthcare plan. The prospect of this option is what led investors to sell shares of private health insurers like UnitedHealth and WellPoint, as investors feared that private companies simply wouldn't be able to compete with a government goliath on pricing, and margins would therefore suffer.
"Big pharma" companies, which include the likes of Pfizer, Merck, and Eli Lilly, could also see their profit margins erode as the government would seek to forcibly negotiate cheaper rates for medications to treat diabetes, heart disease and Alzheimer's, among others. On the other hand, more insured people means a bigger overall market for pharmaceuticals. (Read more about using personal health insurance in Health Insurance: Paying For Pre-Existing Conditions.)
Under this scenario, the positive benefits of a larger market could combine with the bad symptom of lower profit margins to have a net-net effect of zero. If this was the case, the current low valuations on many pharma stocks could make them good long-term holdings, provided that the company has a strong pipeline of new drugs to bring to market. (For further reading, check out Measuring the Medicine Makers).
Generic drug companies could be a big beneficiary of comprehensive legislation, as the government insurer would gobble up generics to use as the main line of offense in treating patients, whenever generic versions were available. There are also many billions of dollars in drugs coming off patent protection in the next decade, giving generic companies a lot of potential market share to compete over.
If a "watered down" form of legislation passes:
First and foremost, shares of health insurers will bounce back, as they would have a more stable footing in the marketplace.
Branded pharmaceutical stocks should also do well, because the weaker form of legislation would involve non-profit insurance cooperatives that would have some power to influence drug pricing, but likely not wield as much as a single government entity.
Technology and Diagnostics – Attractive in All Cases
These industries should do well in either scenario. The 2009 American Recovery and Reinvestment Act has already set aside $19 billion in incentives for the "meaningful use" of electronic medical records (EMRs). Currently, very few doctors are recording and sharing patient information digitally, so companies that aid in this conversion process could see strong growth in the next five to 10 years.
And with preventative medicine set to become a cornerstone of any reform package, look for companies engaged in medical diagnostics and testing to see tailwinds for future profit growth.
Biotech Drugs – Separate Legislation Could Transform Industry
A separate piece of legislation before Congress would permit generic drug makers to submit before the Food & Drug Administration (FDA) applications for generic biotech drugs, also called biologics. Currently, this does not occur in the U.S., which has allowed biotech drugs to remain under an implicit patent protection even after the customary window of exclusivity has passed. If this legislation passes, look for pressure to come under biotech stocks, while generic drug stocks should see a boost in investor interest.
Healthcare has an image as a scary sector these days, but compared to the broad stock market, company valuations are attractive. Savvy investors can use the current fear surrounding the sector to their advantage, and make some selective bets on companies that will not only survive, but thrive in the future - regardless of the shape the final reform bill takes.(To learn more, check out Healthcare Funds: Give Your Portfolio A Booster Shot.)