Health Care Reform Investing

Briton Ryle

Updated June 21, 2013

Health care has always been a costly service in America, costing some $8,608 per capita in 2011, some 17.9% of that year’s GDP, according to the World Health Organization.

dr. obamaIt is so unaffordable that 49.9 million Americans, or 16.3% of the population, were uninsured in 2010, the U.S. Census Bureau showed. This lack of health care coverage accounts for some 48,000 unnecessary deaths every year in the U.S.

Given President Barack Obama’s social work during his early adult years, it is not surprising he would make health care reform one of his first priorities upon first taking the Presidential Office, signing health care reform into law by 2010.

With enrollment into the expanded medical care program scheduled to being October 1st, health care stocks have been surging all year as hospitals prepare to welcome millions of newly insured patients through their doors.

Obamacare’s Economic Impact

Obamacare reforms include federally subsidized health insurance through a brand new network of state-based exchanges – also known as marketplaces – 34 of which will be run by the federal government, while the remaining 16 will be managed by their states.

These new exchanges are expected to add 7 million previously uninsured Americans onto medical plans when enrollment begins October 1st for coverage commencing the first of the year. The number of newly insured is expected to reach 24 million by 2016.

The new insurance plans will make a serious impact on the expenses hospitals currently end up writing off as losses when treating uninsured patients, potentially saving some health care providers as much as 20% of such costs.

“We should see some pretty significant reductions in their bad debt in particular and maybe a little increase in volume,” expects Jeff Jonas, a portfolio manager for Gabelli Funds, speaking to Reuters.

Can Obamacare Obliterate Obstacles?

Yet the President’s health reforms are still being slowed by numerous obstacles, some technical, some political.

The Government Accountability Office reports that the new exchanges have missed important deadlines involving systems for determining an individual’s eligibility for federal subsidies, the certification of health plans offered, and the hiring and training of staff.

Exchanges specifically catering to small business employee medical plans are also behind schedule, with less than half of their deadlines met. The GAO report seriously doubts the exchanges will be ready for the October 1st enrollment commencement date.

Political obstacles have also jumped in the way. Some Republican states, such as Texas and Florida, are refusing to accept federal funding for expanded Medicaid programs. Exchanges in several other states, including Idaho and New Mexico, have had to turn to the federally-run exchange system when their state legislatures blocked the formation of their own state-run exchanges.

But U.S. Health and Human Services has stressed its assurance that the exchanges will be opened on time. “HHS is extremely confident that on October 1 the (federal) marketplace will open on schedule and millions of Americans will have access to affordable quality health insurance,” the department made clear, as cited by Reuters.


Health Stocks Surge

Even with such temporary setbacks and roadblocks, investors are confident the long-term picture looks very profitable for health care provider stocks in the U.S.

Already this year, while the S&P 500 is up just 11%, the largest publicly traded hospital chain, HCA Holdings Inc (NYSE: HCA) is up 24%, Tenet Healthcare Corp (NYSE: THC) is up 32%, Universal Health Services Inc (NYSE: UHS) is up 37%, Community Health Systems (NYSE: CYH) is up 50%, and Health Management (NYSE: HMA) is up 65%.

Thomson Reuters is predicting an increase of 21% in adjusted earnings per share in 2014 for the combined group of the top five hospital operators. The group’s average price to earnings ratio of 12.76 represents a better price value than the S&P 500’s 14.5 ratio.

Mergers and acquisitions within the space are helping cut costs as hospitals synergize supply-lines, lab services, and other expenses. And acquiring physician practices has enabled hospital chains to attain the services of doctors at reduced costs.

Further cost savings are coming from exceptionally low refinancing rates. “They’ve locked [low rates] for years to come,” Jonas informed Reuters.

Still, some are disappointed with fewer than expected hospital visitations so far this year, citing a lagging economy and high unemployment as factors discouraging patients from buying into medical plans.

But that is destined to change quickly beginning January 1st, when Obamacare’s new health insurance plans come into effect. All factors combined prompted Jonas to sound his expectations to Reuters, “It is going to be a multiyear period of benefiting from health reform.”

Joseph Cafariello


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