As we move closer to full implementation of the Affordable Care Act (ACA), also known as Obamacare, at the start of next year, we’re already beginning to see some impact on healthcare stocks. Since the ACA was signed into law in March 2010, the industry has performed well. The Healthcare Select Sector SPDR (XLV) has risen over 50%, slightly outpacing the rise in the S&P 500 over the same period.
The outperformance is not solely due toObamacare, admittedly, as biotechnology stocks have shined with high valuations thanks to low interest rates. Major pharmaceuticals have also done well, reinventing themselves as dividend plays from growth stocks.
Still, with the exception of the controversial tax on medical devices, many investors have come to the conclusion that the law is not anti-healthcare company, and that providing more individuals with easier and more affordable access to care will offset negative provisions of the law. This realization has helped boost the sector, and it will be interesting to see if there’s any impact on the overall economy as we move closer to the start of 2014 and Obamacare becomes more solidified.
One thing we will undoubtedly see as a result of the law is an increase in the role of Medicaid. The law allows for the expansion in Medicaid eligibility for all adults with income of 138% of the federal poverty level, which is currently slightly over $30,000 for a family of four. The number of individuals on Medicaid is expected to increase by approximately 15 million by the year 2020.
The increased number of Medicaid enrollees will provide a challenge to states trying to implement Obamacare, as will the new concept of exchanges and all of the law’s other complexities within its thousands of pages. At a time when many states are already facing rising costs and tight budgets, the Affordable Care Act could be another burden.
This is where one of my favorite plays on the healthcare reform comes in. Maximus (MMS) provides cost-effective processing services to government health and human services agencies in the United States, Canada, United Kingdom, Australia and Saudi Arabia. One of its main focuses is healthcare, providing administrative services for many programs, including Medicaid, Children’s Health Insurance Program (CHIP) and Medicare.
The company has some exciting catalysts for growth ahead that put it right in the middle of the game-changing developments the healthcare industry is experiencing right now. For starters, governments are currently under financial pressure, and at the same time have an increasing number of citizens seeking human services. There is also a growing need for governments to update and modernize these programs. Maximus has the scale and capabilities to deliver these services more efficiently than governments can on their own.
In addition, the Affordable Care Act will also have a very positive impact on the company’s results, as Obamacare will lead to expansion of Medicaid and CHIP programs. Maximus currently administers the CHIP program in 19 states that account for 59% of the total CHIP population.
This is a company that has been successfully administrating state healthcare and other social welfare plans for many years. It has a long track record of providing quality services to its customers and growing for shareholders, and is poised to see that growth accelerate as a result of the Obamacare.
At the time of publication, Kramer held MMS in her GameChangers portfolio.
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