Investing in Health Care in a Post-Reform Era

The series of changes and reformations which started during the 2007 recession has finally made its way to the health care industry and once again changed the way we view and deal with our finances. Though I discuss the basic implications of the new law below, those looking for a deeper view on this topic should review the documents issued by the U.S. government. In March 2010, the House passed the Senate version of the health reform by a vote of 219-212. Shortly after, President Obama signed into law the Patient Protection and Affordable Care Act, which mandates that large employers either provide health care coverage to their full-time employees, or incur a sizeable fine. The passage of the 3,000-page health care reform had one immediate impact which we should give particular attention to, removal of most of the uncertainty surrounding the health care stocks. As an intelligent investor, your job is to take the good and the bad news and to find ways to profit from it. Now that the uncertainty is largely removed, let’s take a look at some of the immediate changes caused by this bill:

Expansion of insurance coverage (largely to begin in 2014) U.S. deficit reduction by $143 billion over ten years Dependents under 26 can remain on their parents health coverage Requirement for Americans to purchase insurance or pay a fine Reduction in the out-of-pocket drug expenses for seniors Increase in Medicare tax on high-income Americans Annual taxes on pharmaceutical, medical device, and health insurance

companies Everyone must purchase health insurance by 2014 or face a $695 annual

fine 3.8% Medicare tax on dividends, capital gains, rent and royalties on

couples earning more than $250,000 and singles earning more than $200,000 a year

2.35% Medicare tax on earned income on couples earning more than $250,000 and singles earning more than $200,000 a year

Businesses employing fewer than 50 employees will receive subsidies to help offset the costs of providing health insurance

Businesses employing greater than 50 employees will be fined $2,000 per employee each year if they don’t offer health insurance to full-time employees

Though endless debates about the necessity of these changes will go on for quite some time, our sole purpose is to understand how to stay afloat and to take advantage of these changes. Pharmaceutical Industry The new bill is lined up so that the pharmaceutical companies will contribute approximately $30 billion in additional taxes over the next 10 years to the health care legislation. Though this number appears quite large, the vast majority of this

Saliq J. Khan Editor-in-Chief

Saliq Khan is the Editor-in-Chief of InvestmentHead Market Commentary, a weekly market commentary report. A Chartered Retirement Planning Counselor, Mr. Khan specializes in individual and corporate retirement planning, pension plans, asset management, investment strategy, income taxes and estate planning. InvestmentHead publishes market commentaries which largely summarize the views of the author and provide a way for the individual investor to gain market knowledge. We primarily publish weekly market commentaries, summarizing what happened during the past trading week and what to anticipate during the upcoming trading week.

negative impact will be absorbed by the positive impact generated by the newly insured Americans. Approximately 32 million people will now have access to prescription drugs and firms such as Johnson & Johnson, Walgreen and CVS are likely to benefit. With more people being insured, there is bound to be a long wait to see your primary care doctor for things such as the common cold, and in-store clinics (available at CVS and Walgreen) stand to benefit from this. Medical Device Industry Medical device companies will also face additional taxes of nearly $23 billion over the next 10 years. One thing to pay close attention to is that as more people get insurance, the number of surgeries should rise, thereby benefiting the medical device companies. Regardless, the outlook for this industry is negative and has already been reflected in the stock prices of these companies. Health Insurance Industry Of the three major industries mentioned in this article, the health insurance industry is the one faced with the largest tax increase, totaled over $80 billion over the next 10 years. Given that this bill doesn’t directly address the underlying problem of rising health care costs (rather, the legislation promotes increased access), if health care companies are pressured to restrain the rate of premium increases, this could result in the companies absorbing more of the underlying costs and constricting their profits. Though numerous uncertainties remain regarding the health insurance industry, holding equity in this industry could prove to be beneficial. This presumed benefit can be attributed to the historically low stock prices of the insurance companies, the potential of adding new insured Americans, and the opportunities to work with the government in shaping the individual mandates.

Now that there is more certainty as to the structure of the health care reform, companies will able to concentrate on growing their businesses and investor sentiment towards this sector is likely to improve. Several more changes within the health care sector are likely to come and the largest impact of this new law will be on the expansion of the insurance coverage.

Winners Health Insurance Companies 32 million people added to the system and

companies such as Wellpoint (local Indianapolis company) are likely to benefit.

Hospitals Hospital occupancy will increase and revenues will increase.

Pharmaceuticals Uninsured The biggest winners are the 32 million people

who now have access to health insurance.

Not So Fortunate Doctors Doctors will be overworked and underpaid. Previously Insured Patients Quality of care is at risk of going down. Industrials Companies are now required to provide health

insurance or incur a fine. This will not be a problem for companies that are cash rich and provide this already.

Taxpayers Taxpayers in the high income bracket will be hit the hardest, but due to the possibility of increased costs, there is a likelihood of an increase in taxes being felt by all taxpayers.

Unemployed Companies are now required to provide health insurance to their employees and for this reason we may see a rise in temp and contract workers, as opposed to the full-time, salaried employees.

© 2009 InvestmentHead.com. All Rights Reserved. The opinions expressed here are solely that of the author. This is not intended to be relied up as a forecast, research advice, recommendation, or solicitation to buy or sell any securities. The opinions expressed are as of the date above and are subject to change. The information is derived from sources deemed to be reliable, and are not guaranteed as to accuracy. The information contained in this paper is based upon or derived from information generally available to the public from sources believed to be reliable. Past performance is no guarantee of future results. Reliance upon information in this material is at the sole discretion of the reader.