On Tuesday, the Trump administration provided its formal backing to a draft bill introduced by House Republicans which aims to repeal and replace the Obamacare healthcare law. Such an action comes as no surprise since Trump has always been an outspoken critic of the Affordable Care Act. Healthcare stocks declined on Monday after the GOP unveiled its new healthcare proposal with the iShares U.S. Healthcare ETF (IYH) losing 1%.
But a careful examination of individual gainers and losers following the announcement tells a more complex story. The new healthcare legislation has its own sets of winners and losers and the sector as a whole continues to remain strong. This means that it’s a good idea to pick those stocks which are poised to gain from the new healthcare law.
Enter ‘Obamacare Lite’
The Republican proposal, also called The American Healthcare Act (AHA) proposes to ring in radical changes, such as eliminating the taxes mandated under Obamacare. At the same time, it seeks to retain some of the existing legislation’s more popular provisions.
In a sense, the new legislation retains the essential framework of the Affordable Care Act, which is why it is at times being referred to as “Obamacare Lite.” At the same time, it is short on details, since the costs accrued to the government under the new law remains unknown. Additionally, the number of people likely to feel the impact of the legislation also remains unclear.
The new legislation proposes to replace the mandatory requirement to purchase insurance with a system of penalties to be imposed by insurers. Also, subsidies are to be replaced with tax credits which are refundable. Further, all taxes levied under Obamacare will be abolished. Under the new law, states will have greater responsibility. However, insurers will still have to provide cover to individuals regardless of any preexisting conditions.
Possible Losers in the Healthcare Sector
Following the unveiling of the new law, hospital companies Community Health Systems, Inc. (CYH) and Tenet Healthcare Corp (THC) lost 2% and 3% on Tuesday. Under the ACA, the sector began to get paid for several services which they would earlier have to provide free of charge. However, under the new law, several individuals would lose their healthcare coverage. This means that hospitals would again have to face a scenario where they wouldn’t get paid for several services.
The AHA has expressed its concerns about the new legislation saying that the “most vulnerable” would likely lose cover under the act. At the same time, the new legislation could help hospitals improve their collections from individuals.
Also, two of the biggest Medicaid focused healthcare insurers, Molina Healthcare, Inc. (MOH) and Centene Corp (CNC) moved marginally lower. Though WellCare Health Plans, Inc. (WCG) remained unaffected on this occasion, it is likely that this stock will not be spared once the new law comes into force.
A provision of the new legislation calls for cutting Medicaid funding by giving a block of fund to each state after which the states will be on their own, without recourse to federal funds in case of a shortfall. This would lead to several individuals losing coverage which would result in a loss of business for the likes of Centene.
The Clear Healthcare Winners
In contrast, larger, general healthcare insurers stand to gain since the requirements mandated of them by Obamacare will decline.
In such an event, the likes of UnitedHealth Group Inc (UNH), Aetna Inc (AET), and Humana Inc (HUM) are likely to gain. However, they are likely to witness an increase in competition if the trend of selling insurance across state lines catches on.
The medical devices sector certainly stands to gain since all taxes imposed under Obamacare will cease to be levied. Ever since the ACA came into force, these companies have complained about the 2.3% excise tax levied on them, the proceeds of which were used to subsidize insurance for individuals from lower income groups. This is why Boston Scientific Corporation (BSX) and Edwards Lifesciences Corp (EW) are likely to welcome the new law.
Pharmaceuticals do not find any place in the new law. However, President Trump had voiced his concerns about drug pricing on the campaign trail. On Tuesday, pharma stocks nosedived after Trump tweeted that he was working on a “new system” to reduce drug prices in the industry. Predictably, the President provided no further details. Given this backdrop, it is likely that generic drugmakers will find that a Trump administration is relatively more beneficial to them.
Our Choices in Healthcare Stocks:
Several market watchers and a substantial section of the healthcare industry are viewing changes to the healthcare legislation with a lot of trepidation. A more reasonable approach for investors would be to recognize that the new legislation provides fresh opportunities for them to profit from.
Adding stocks slated to benefit from the new law to your portfolios makes for a prudent option at this point. However, picking winning stocks may prove to be difficult.
This is where our VGM score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM score.
Inogen Inc (INGN) develops, manufactures and markets portable oxygen concentrators (POC).
Inogen has a VGM Score of B. Its earnings estimate for the current year has improved by 27.1% over the last 30 days. The stock has a Zacks Rank #1(Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
OraSure Technologies, Inc. (OSUR) is a developer, manufacturer, marketer and seller of oral fluid diagnostic products and specimen collection devices and operates on a global scale.
OraSure Technologies has a Zacks Rank #2 (Buy) and a VGM Score of A. Its earnings estimate for the current year has improved by 82.1% over the last 30 days.
Lannett Company, Inc. (LCI) is a manufacturer and distributor of generic versions of branded pharma products in the U.S.
Lannett has a Zacks Rank #2 and a VGM Score of A. Its earnings estimate for the current year has improved by 1.7% over the last 30 days.
Cardiovascular Systems Inc (CSII) is a medical device manufacturer that develops and commercializes innovative solutions to treat patients suffering from peripheral and coronary arterial diseases, including those with arterial calcium.
Cardiovascular Systems has a Zacks Rank #2 and a VGM Score of B. The company has expected earnings growth of 95% for the current year.
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