Financial pundits continue to study how the Accountable Care Act (ACA), the manifesto for health care reform, will affect health industry stocks as it continues to roll out. A core motivation behind the ACA is the desire to create access for millions of Americans without health care.
Most investors expect insurance companies to enjoy greater enrollment, pharmaceutical and equipment manufacturers to fill more prescriptions, and hospitals to benefit from higher utilization. Jim Russell, senior equity strategist with the U.S. Bank Wealth Management Group, touts the health care industry as the best-performing sector in the first half of 2013.
However, Lena Gan, senior financial adviser and Personal Investment Advisory portfolio adviser at Merrill Lynch, said that while there will be winners and losers in the health care industry, the details of Obamacare have not fully played out and that investors should view health care stocks with caution.
While Obamacare eventually will increase the volume of patients in the American health care system, costs will be wrung out at every level. Providers now must demonstrate meaningful use of electronic health records while hospital performance and insurance companies’ profit margins are falling under greater scrutiny. At $2.7 trillion, more than 17 percent of gross domestic product and more than $8,000 per capita, the United States continues to be among the largest, most expensive and least-efficient health care systems in the world. That has to change, but is it changing for the better or worse?
Financial markets respond poorly to uncertainty. If nothing else, Obamacare has injected a huge dose of the unknown into a health care system that already was fractured. Political and legal challenges have further affected business confidence. In addition, the stipulations of the ACA are complex, not fully understood and, as yet, incomplete. Adding to the confusion is that each state is responding to calls for compliance in its unique way.
Furthermore, the changes prescribed do not have a single start date but are staged to roll out over a period of several years, and the schedule continues to change. Initially, the Medicare cuts set by Obamacare were postponed until after the presidential election. Next, there was a one-year delay given on the mandate for employers of 50 or more to provide health insurance to workers. This move caused health care stocks to retreat across the board. Most recently, it appears that caps on out-of pocket insurance costs will be delayed one more year.
Each time the game changes, industry players must adjust and adapt. To comply, myriad new systems and cooperative interfaces are now required of all aspects of the industry. That means capital investment and process change. All of this adds to the cost of doing business and causes investors to take a pause.
Creating improved access to health care for Americans is the right thing to do. Wrestling down costs and increasing efficiencies is critical, but the road to reform has been bumpy and painful. As with any great change, there will be winners and losers. I agree with Gan, the financial adviser, and have not invested in health care stocks. If I do, I plan to sell short to profit if the stock declines.
At the end of the day, will the trifecta of increased access, reduced cost and truly improved care become a reality? That remains to be seen. Let’s hope so.
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Ira Zunin, M.D., M.P.H., M.B.A., is medical director of Manakai o Malama Integrative Healthcare Group and Rehabilitation Center and CEO of Global Advisory Services Inc. Please submit your questions to info@manakaiomalama.com.
