Obamacare Won’t Deliver — Sell Hospital and Managed Care Stocks, STAT!

by Jeff Reeves | September 30, 2013 1:36 pm

If you’ve been paying attention to financial media at all in the past year, then you’ve heard the shtick before: Obamacare means new “customers” for managed care stocks and hospitals.

UnitedHealth (UNH[1]), Aetna (AET[2]) and WellPoint (WLP[3]) — the three largest managed-care insurers, as measured by market capitalization — are all up more than 30% year-to-date to outperform the S&P 500. And hospital operators like Health Management Associates (HMA[4]) and Universal Health Services (UHS[5]) are up big this year, too.

They can only keep going up, right?

Wrong.

The narrative of perpetually higher prices for these healthcare stocks has been spun in some form since the 2010 passage of the healthcare overhaul, formally called the Patient Protection and Affordable Care Act.

But don’t believe the hype about Obamacare. The program might never deliver on these hopes, and the stocks that have been bid up with expectations of new paying customers could be sorely disappointed.

That means things could sour in a hurry for these stocks, so investors should take the launch of the healthcare exchanges on Oct. 1 as an opportunity to get out while the getting is good.

Here are the problems with the high hopes for Obamacare stocks:

• Americans Don’t Get It: The typical American with a full-time job and a college education has a hard enough time comparing a PPO with an HMO in the annual open enrollment for health insurance at the office. In fact, a study[6] that appeared in the September issue of the Journal of Health Economics showed very little understanding on the part of American healthcare consumers. Only 14% of survey respondents understood the four basic insurance concepts of “deductible, copay, co-insurance and out-of-pocket maximum.” How do you think working-class Americans in their late 50s or a frazzled single mom living in the inner city is going to do navigating these new healthcare exchanges on their own?
• Many Americans Don’t Want It: As recently as this month, public opinion polls show that more than 40% of Americans[7] are opposed to the healthcare law. Now, we can debate whether those opposed are actually going to be potential “customers” of Obamacare, but that number is still pretty darn high.
• Related Stocks Have Been Bid Up Big: Let’s consider, however, that the White House gets the word out and that Americans do enroll en masse. Well, even that doesn’t guarantee the stocks related to Obamacare will go up any more from here. Consider that after the financial crisis, managed-care stocks Aetna, Wellpoint and UnitedHealth all traded for a forward P/E as low as 5 and finished 2009 trading at or below a forward earnings multiple of 10. But after the passage of the Affordable Care Act, they all popped — and now UNH, for example, trades at 13 times forward earnings. Feels to me like even if the expectations are met, the gains have already been had.

To me, Obamacare is a classic example of “buy the rumor, sell the news.” As soon as the Affordable Care Act passed in March 23, there were those who began speculating on the impact — and in late 2012 after Obama retained the White House (and his veto power to any bill gutting his health care law) and the Senate remained Democratically controlled, it was off to the races.

If you’re still looking to play Obamacare a year later, the best you can hope for is to get in late to a trade that many others have already figured out.

And worst-case scenario? The high hopes for hospitals and managed-care stocks don’t pan out … and you’re left holding the bag after paying a premium for your investment at this stage.

I’d advise looking elsewhere if you’re hunting for new buys, and to forget about an Obamacare play.

And if you’re sitting on big profits in some of these stocks, perhaps it would be prudent to reallocate some of your funds — just in case things don’t go as well as the president hopes.

Jeff Reeves[8] is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[9] As of this writing, he had no positions in the stocks mentioned. Write him ateditor@investorplace.com[10] or follow him on Twitter via @JeffReevesIP[11].

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