Broker Check

With Obama Election Win "Mr. Market" Weighs in on the ACA Equity Winners and Losers

| November 20, 2012
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The first trading session following the election on Wednesday, November 7, 2012 gave us some clues on how different sectors of the health care market may be affected by the ACA, as Obama’s win confirms that health reform marches forward. “Mr. Market” has spoken.

“Mr. Market”

For those that may be unaware, “Mr. Market” was Benjamin Graham’s term for the stock market in explaining fluctuations. Graham is the father of value investing and Warren Buffet’s most influential mentor. According to Graham, Mr. Market is emotionally unstable but doesn’t mind being slighted. If Mr. Market’s quotes are ignored, he will be back again tomorrow with a new quote.

So, the point is that successful investors do not place themselves in emotional whirlwinds often created by the market. This first post-election trading session was such a whirlwind. Large groups of people (such as those that voted with their pocketbook in this telling stock market session) are smarter than an elite few, or so goes the premise of James Surowiecki’s Wisdom of the Crowds.

Now; what did we learn from the combined investing public wisdom about the future of healthcare companies profitability with ACA?

Keep in mind the overall market was down 2.4% on the day as measured by both the Dow Jones Industrial Average and the Standard & Poor 500. The biggest concern of the day was investor worry about the so called “fiscal cliff” and the debate over billions in spending and tax increases. Considering the total market on November 7th, health care stocks performed as a group better than the averages, but Mr. Market definitely parsed health care stocks by sector from “great” to “dreadful” based on the implications of impending health care reform:

Great:

Hospital Stocks

  • Health Management Associates (HMA) +7.3%
  • HCA Holdings Inc. (HCA) +9.4%
  • Community Health Systems Inc. (CYH) +6.0%
  • Tenet Healthcare Corp. (THC) +9.6%

Yes, there were stocks that went up stridently on the big down day. Not surprisingly, hospital stocks are expected to benefit from the estimated 30 million Americans who will line up for insurance coverage beginning in 2014, increasing profits and decreasing bad debts.

Medicaid HMOs

  • Molina Healthcare Inc. (MOH) +4.6%
  • Centene Corp. (CNC) +10.1%
  • WellCare Health Plans Inc. (WCG) +4.4%

Health insurers that typically focus heavily on Medicaid are up in line with ACA provisions to expand care for the poor. Mr. Market tips his hat to Centene Corporation, which has been successful in procuring multi-line coverage contracts with States including long-term care, vision, dental, behavioral health, CHIP and disability.

Good:

Drug Wholesalers

  • McKesson (MCK) +1.3%
  • Cardinal Health (CAH) +.5%
  • AmerisourceBergen (ABC) +1.0%

Growth in prescription drug spending means increased revenues for the drug wholesalers, so ACA should be a positive for this group. But because a majority of wholesaler profits come from generic drugs, and because wholesalers are indirectly affected by changes in pharmacies, pricing pressures will keep the wholesalers in check.

Fair:

Pharmacy Benefit Managers

  • Express Scripts (ESRX) -0.4%
  • CVS Caremark Corp (CVS) -0.4%

As an intermediary between the payor and everyone else in the health-care system, PBMs process prescriptions for groups such as insurance companies and corporations and use their large size to drive down prices. These companies are incentivized to cut costs and have been thought to benefit greatly from ACA, and will expand prescription drug insurance plans sold through health insurance exchanges starting in 2014.

Generic Pharmaceuticals

  • Teva Pharmaceutical Industries Ltd ADR (TEVA) -0.7%
  • Mylan Inc (MYL) -0.8%
  • Dr. Reddy’s Labs (RDY) -0.6%

Health care reform is good for generic drugs with anticipated increased dispensing of drugs in general.  With more funds spent on Medicaid, the ACA will certainly be generic oriented and should fare better than the name-brand drugs. Pricing pressures are expected over the longer term however.

Testing Laboratories

  • Quest Diagnostics (DGX) -1.5%
  • Laboratory Corp of America (LH) -1.9%

More patients you would think would mean more medical tests. In a recent Gallup survey, physicians attributed 34 percent of overall healthcare costs to defensive medicine (think diagnostic blood tests/invasive biopsies, etc). ACA may curb this expensive part of medicine and appears to have very negative implications going forward as Labs will have intense pressure to reduce rates. However, these larger labs held up better than the market averages suggesting that lab work isn’t going away with ACA.

Big Pharmaceutical Companies

  • Pfizer Inc.  (PFE) -2.2%
  • GlaxoSmithKline PLC (GSK) -0.8%
  • Eli Lily & Co. (LLY) -1.2%

The name-brand large Pharmaceutical companies have agreed to rebate Uncle Sam on Medicaid purchases and must give the elderly discounts. But there will be a lot more of us taking drugs too.

I’ve ranked these 4 health care sectors “fair” considering that broader stock market averages were down 2.4% for the day and Mr. Market was kinder to this group with only a slight negative. Likewise, it appears that he is anointing this group as a benefactor of upcoming reforms.

Not Good:

Medical Device Companies

  • Medtronic Inc. (MDT) -3.0%
  • Stryker Corporation (SYK) -1.6%
  • Boston Scientific Corp. (BSX) -3.6%
  • Zimmer Holdings Inc. (ZMH) -1.8%

The 2.3% excise tax on revenue of medical-device companies is looking more inevitable, in spite of industry lobbying group efforts.

Dreadful:

Medicare Part D Companies

  • Humana Inc. (HUM) -7.9%
  • WellPoint (WLP) -5.5%
  • Cigna Corp. (CI) -0.7%

Even though managed-care companies should gain millions of new customers thanks to the ACA, profit margins are expected to decline significantly.  Mr. Market went easy on Cigna, perhaps because of the company’s focus on self-insured large employers.

Currently

Currently it is unclear how the increased revenue generated from more patients will affect the increased margins to the various sectors of the healthcare market. Also, too much weight should not be placed on this one day action by the market. One thing is clear however, and that is how Mr. Market and the market at large feels at first blush towards the impending implementation of the ACA based on the November 7, 2012 trading of the respective stocks.

Assessment

Remember: Mr. Market is temperamental and can change his mind anytime!

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