Last week, I explained why I hate “Obamacare.” I won’t get into those details again, but I will explain some of the issues we face as investors.
The biggest issue is simply that of the unknown. Because Obamacare — officially the Affordable Care Act — has so many moving parts, it’s hard to say what its long-term effects will be on the assorted companies that make up the healthcare sector, but at least a few ideas are shaping up.
Here’s a look at how to approach two sectors: insurance stocks and hospital stocks:
I’ll start with insurance stocks. Given that Americans will now be required to buy health insurance, the industry as a whole should expect to see 48 million new customers (i.e. the number of Americans currently without health insurance). This should be a major boon to insurers like UnitedHealth (UNH), Humana (HUM) and Aetna (AET), right?
Not necessarily. In fact, American Health Insurance Plans — the industry lobby group — spent $102 million trying to defeat the legislation.
Obamacare will bring with it a boost to insurance company revenues. But it will almost certainly come at the expense of margins. Remember, some of the currently uninsured are people who are effectively uninsurable, or those with pre-existing conditions. These new customers are money losers for the industry.
Muddying the waters more are the provisions regulating the “medical loss ratio.” Under Obamacare, insurance companies will have to spend at least 80% of the premiums you pay on actual health care expenditures (as opposed to administrative overhead). Or flipping the numbers around, the insurance companies would have to limit their overhead to no more than 20% of their premiums received. Any insurance company that went over these levels would have to pay their customers a rebate. Currently, many health insurers have numbers closer to 25% to 30%.
And because Obamacare gives the federal government unprecedented regulatory control over the industry — and given the politicization of healthcare — it’s hard to see the insurance companies being allowed to fully benefit from any improvements. “Excess” profits will result in calls for premium reductions or rebates.
I’m not defending the health insurance industry. In fact, I dislike these people on a personal level. Give me five minutes alone with the CEO of any major health insurance company, and I don’t know that I would be able to stop myself from brutally kneecapping them with a tire iron. My hostility is a product of years of filling out maddening paperwork and spending a small fortune on premiums for lousy coverage.
But I digress. My point is simply that, over the long-term, Obamacare is not necessarily bullish for health insurance stocks.