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.

Investment Opportunity?
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 โ€“ 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 โ€“ 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.

Parting Thoughts
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.)

Related Articles
  1. Stock Analysis

    How Medtronic Makes Money (MDT)

    Here's the story of an American medical device firm that covers almost every segment in medicine and recently moved to Ireland to pay less in taxes.
  2. Investing News

    Is the White House too Optimistic on the Economy?

    Are the White House's economic growth projections for 2016 and 2017 realistic or too optimistic?
  3. Economics

    Economist Guide: 5 Lessons Milton Friedman Teaches Us

    Find out what can still be learned from the late economist Milton Friedman, a Nobel prize winner and champion of free market economics.
  4. Budgeting

    The Honest Company Bundles Review: Are They Worth It?

    Learn more about The Honest Company and its bundle subscription services, which deliver discounted diapers, formula and other baby products to your doorstep.
  5. Fundamental Analysis

    Quantitative Easing Report Card in 2016

    Find out why quantitative easing has not worked, despite the best efforts of the Federal Reserve, and how it has fueled the national debt problem.
  6. Economics

    Economist Guide: 3 Lessons Karl Marx Teaches Us

    Read about three lessons that modern economic thinkers can learn from German philosopher Karl Marx, the founding father of communism.
  7. Budgeting

    5 Alternatives to Traditional Health Insurance

    Discover five of the most popular alternatives to traditional health insurance plans, alternatives that are increasingly popular as health insurance costs rise.
  8. Economics

    How Bernie Sanders Has Avoided Big Money (Mostly)

    Bernie Sanders hasn't entirely avoided PACs with his fundraising, but he has gotten a lot of bang for the buck
  9. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow โ€“ if there's any left. Read on to see if it'll work as an income source after you've retired.
  10. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
RELATED FAQS
  1. Does dental insurance cover implants?

    Dental implants have become a widely used procedure in dentistry. Despite their popularity, however, they tend to not be ... Read Full Answer >>
  2. Does dental insurance cover dentures?

    Most full dental insurance policies include some restorative coverage, usually meaning that up to 50% of the cost of dentures ... Read Full Answer >>
  3. Can CareCredit be used for family members?

    CareCredit has become a widely used option when it comes to paying for medical procedures, primarily procedures not typically ... Read Full Answer >>
  4. Can a Flexible Spending Account (FSA) be used for dental?

    Flexible Spending Accounts (FSAs) can be used to pay for dental expenses including deductibles and co-payments with pretax ... Read Full Answer >>
  5. Does dental insurance cover braces?

    Most regular dental plans cover little to none of the costs of braces. The primary focus of regular dental plans is prevention ... Read Full Answer >>
  6. Does dental insurance cover crowns?

    Dental insurance coverage may vary according to the type of plan and the level of benefits that you have elected. Most dental ... Read Full Answer >>
Trading Center