Friday, October 4, 2013

Which Companies Will Benefit from Obamacare?


Writing in his excellent book Lives of a Cell: Notes of a Biology Watcher, author Lewis Thomas wrote that his mother cried when he became a doctor in 1938.

It wasn't that she was proud of him - although she probably was - but rather becoming a doctor in the first part of the twentieth century meant a meager living on modest wages for the rest of your career.

This all changed when the government became more involved.  With the introduction of such programs as Medicare, and allowing employers to offer tax-free health care benefits to their employees, the medical field saw a massive infusion of funds that made companies prosper and dramatically increased the income of medical professionals.

If you had simply invested in healthcare stocks in the 1960's with the introduction of Medicare and Medicaid, you would have made enormous gains over the next few decades.

With this history in mind, I have been wondering whether the new Affordable Care Act (a.k.a. Obamacare) offers the same opportunity.

Regardless of how you feel about the program, millions of people will now be covered by health insurance. Potentially this could lead to increased usage and perhaps more profits.

Hospitals should be a clear winner.  Bad debt expense at most hospitals runs in the 20% range, and Obamacare should greatly reduce the problem. 

Diagnostic companies might also benefit from increased usage.

The new law is probably a net neutral for the pharmaceutical companies. True, they may see volumes increase, but with more attention on pricing margins might be squeezed.

The same might be true for the private health insurers.  Most will probably see a dramatic increase in enrollment, but with competitive pricing available on healthcare exchanges profitability may not benefit.  There probably will be a wave of merger activity in the group - size will definitely be key to success.

The medical device companies probably will suffer due to the new tax on medical devices that Obamacare mandates.  This sector had already seen a dramatic slowdown in volumes, and the additional tax will be a further drag on usage.  Many of the companies are already focusing their attention on cost cuts in an effort to maintain profits.

Healthcare stocks have already moved up sharply in 2013, as investors anticipate the gains that the industry will see from Obamacare.  However, it seems likely that further advances are likely in the years ahead.