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.
Reducing the number of uninsured patients eases the strain on the emergency rooms and eliminates a large chunk of the hospital’s bad debts. It won’t eliminate them, mind you. There will always be some number of people without insurance — such as those who are habitually unemployed and don’t file tax returns — and some low-income patients might have a hard time paying their deductibles and copays. But it potentially makes a big problem a lot smaller. Doctors and nurses might find some of the legislation’s micromanagement to be costly and cumbersome, but for the hospital companies themselves, Obamacare is mostly a positive.
The most frustrating aspect for an investor looking to allocate funds to the health sector is that politics and regulatory muddle trump economics and demographic trends. It’s great to know that the aging of the baby boomers will create unprecedented demand for medical services and devices. But how do you invest accordingly knowing that the profit margins will be taxed and regulated away?
My favorite way to play the sector is via medical office REITs. Doctors face years of bureaucratic hassle in implementing Obamacare that might affect their take-home pay. But they are still going to pay their rent every month. The rising health needs of the baby boomers will create an ongoing need for new medical facilities, and frankly, I’d rather be the landlord than the doctor.
A medical office REIT that I particularly like is the Healthcare Trust of America (HTA). The REIT has a growing portfolio currently consisting of 250 properties with a total purchase price of $2.7 billion. It also happens to pay a handsome 5.2% dividend which I expect to see grow in the coming quarters.
One nice aspect of HTA is that it is a young REIT. The REIT was founded in mid-2006 and only began trading in 2012. This means that HTA missed most of the run-up in property prices in the mid-2000s and has comparatively few “legacy” properties purchased at inflated priced.
And as an added sweetener, HTA saw a steady stream of insider buying throughout the summer’s “taper tantrum” that saw the prices of many REITs — including HTA — get hammered. Four company officers bought a combined 33,000 shares worth $343,940 in the month of August alone.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he was long HTA. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.
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