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Ready or Not, Here Comes Obamacare!

4 October 2013 in Trading Ideas

While its long-term funding didn’t look to be particularly certain this past week, the Affordable Care Act — which has already given us wonderful terms like “individual mandate” and “pay to delay” — is upon us.

Now that millions of Americans apparently wasted no time in logging onto online health insurance exchanges this past Tuesday, the sea of change in how US healthcare operates has likely begun.1

Naturally, no small part of that change will be financial. And while the impact to consumers or healthcare providers has yet to be sorted out, that’s never stopped investors from making their own guesses.

That tendency of investors to look to the future was a big part of why we created the Obamacare motif, which comprises stocks that may be positioned to perform well under a thriving new era of healthcare reform.

obamacare motifThe motif is up 28.2% in the past 12 months, dating back to the days when a second Obama administration – and his pet healthcare law – looked imminent. During that same time, the S&P 500 has increased 18.3%.

In the past month, as Obamacare’s October, 1, 2013, start date drew closer, the motif has risen 3.2%; the S&P is up 2.3%.

Now that Obamacare has actually arrived, perhaps it’s worth a look at the reasons investors might consider embracing new opportunities in the healthcare sector. We took a closer look at the possible upside for generic drugmakers in this article, so let’s focus on two key sectors: pharmacy benefit managers and hospitals. Together, those two segments account for more than 62% of the weighting in the Obamacare motif (generic drug stocks add another 19%).

As Jeff Jonas, portfolio manager at Gabelli Healthcare and WellnessRx Trust, told Yahoo Finance earlier this summer, pharmacy benefit managers could stand to benefit as new customers join the insurance rolls, and as brand-name drugs lose patent protection and face competition from generic drugs.2

Under the new focus on lowering costs, Jonas says, companies like Express Scripts and CVS Caremark (which, combined, account for 39% of the Obamacare motif) expect to see a bigger part of their revenue stream coming from encouraging and facilitating the use of lower-cost drugs. Plus, they essentially escape any of the new taxes that the new law is levying on the likes of insurance and pharmaceutical firms.

Given the boost to the potential customer base, hospital operators – and their stocks – may also see a boom. As investor Niagam Arora pointed out on Marketwatch last year, the new law means utilization rates will increase at hospitals, which should see a fall in uncollected receivables.3

That’s because Obamacare increases the pool of paying patients, thereby solving a big problem for hospitals that weren’t able to collect from low-income patients who were using emergency services but had no insurance, or were underinsured. Some hospitals have been unable to collect as much as 30% of their billings, according to Arora.

How the new law will change that figure is difficult to predict, but a significant rise in paying customers has rarely been a bad thing in any business.

1Abby Goodnough, Robert Pear and Richard Perez-Pena, “Opening Rush to Insurance Markets Runs Into Snags,” nytimes.com, Oct. 1, 2013, http://www.nytimes.com/2013/10/02/us/health-insurance-marketplaces-open.html?hp&_r=0.

2Althea Chang, “Generic drugs, Obamacare good news for some firms, Yahoo Finance, July 30, 2013, http://finance.yahoo.com/blogs/big-data-download/generic-drugs-obamacare-good-news-firms-195727295.html, (accessed Oct. 1, 2013).

3Niagam Arora, “26 Ways to Profit from Obamacare,” marketwatch.com, Nov. 8, 2012, http://www.marketwatch.com/story/26-ways-to-profit-from-obamacare-2012-11-08, (accessed Oct. 1, 2013).

Tags: Obamacare
  1. d smith
    5 Oct at 4:54 pm

    Makes sense, however, if low-income patients cannot pay now how does this mean they will be able to pay after? This does not put money in their pockets. Do those who do pay their own bills also pay higher taxes so that the government can pay the low-income bills?

    If so, that means that, not only do I have to pay my insurance and my hospital bill but also higher taxes to the government so that they can pay my neighbor’s bill. As a lower middle income, honest (because I pay my bills) citizen who does not go to the doctor when sick because I cannot pay the bill, this is bad news. This tells me that while I am home suffering my neighbor is going to the doctor and my tax dollars are paying for him/her to be healthy and not for me to be healthy. Is this how it works?

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