Whatever your view on the health care bill, it is now the law of the land, to be implemented in stages over the next several years. From an investor’s standpoint, what impacts might this mean for your portfolio?
Analysts have been singling out individual companies for analysis post-reform, with conflicting opinions issued on the same company at times (take a look at EHTH pro and con opinions). But what about the larger trends facing insurance companies and health care providers? Opponents of health care reform have argued that it will do nothing to control costs, while supporters point to cost control measures in the bill and its CBO scoring as validation. Both sides are implicitly talking about the same macroeconomic indicator: what will the future rate of healthcare inflation be?
Since 1980, the national healthcare inflation rate has been almost double the overall rate of inflation (CPI). This extraordinary growth rate for the healthcare industry led to the pharmaceutical and biotech booms of the 90’s, and to the medical device boom of the 2000’s, with companies like MedTronic (MDT), Amgen (AMGN), Genzyme (GENZ), and others bursting onto the scene. But what if the healthcare inflation rate were to drop down to the level of the CPI? Whether as a result of healthcare reform, or as a result of Medicare and the government’s shaky finances, healthcare spending could be reaching a plateau. Can companies born in an environment of a healthcare spending free-for-all thrive in more restrained times?
HiddenLevers has modeled a scenario in which the healthcare inflation rate drops to 2%, roughly in line with long term inflation rates. This scenario would significantly impact the stock price of companies like MDT, LNCR, PRGO, BKD, and those in similar industries. On the other hand, the new healthcare reform law will benefit IT services providers from IBM on down as they help implement IT modernization mandated by the new law. Interestingly, a follow-on benefit of lower health care inflation might be a reduction in the overall rate of inflation, which would actually benefit financial services companies which are sensitive to long term interest rates. Mortgage REITs like NLY and financial services companies like AXP may experience a small benefit if this proves to be true.
You can run the Healthcare Reform scenario on HiddenLevers here – you can change the assumptions to match your own predictions on the end result, and see how that affects your portfolio.