|
|
MAKING CENTS OUT OF THE NEWS
Blog #12
(March 25th, 2010)
Stocks in the New Health Care Act Era
By Tom McAllister, CFP®
Momentous? Historic? Life-changing for Americans? The stock market didn't think so, responding earlier this week to passage of the health care reform bill with one big yawn. I, on the other hand, have had numerous inquiries regarding the impact of Obama Care on stocks, in particular the stocks of insurance companies, hospital chains, drug companies, and large-cap companies in general.
Remember, the stock market functions as a discounting mechanism for the future. That means the pricing of individual stocks today reflects what investors, in total, expect to happen in the future. This discounting process takes place every market day, affecting prices for the stock of every publicly held company, with every investor having an impact on the market price of shares. If the majority of those interested in a particular company have a positive outlook for the future, the price of that company's stock will move up until it reaches "equilibrium". The same applies if the majority opinion is on the negative side. In that case, prices move downward until the stock is perceived as a bargain and investors begin to purchase shares, thus stabilizing the price. That very "give and take" is what “makes a market".
Stocks of health insurers, for example, are selling right now at very low multiples of record earnings, a result of investors' concern for the future of health insurance providers under the new rules. The answer, in my view, is a simple one: Insurance companies will factor the additional costs imposed upon them by Obama-Care requirements, and raise the premiums they charge policy holders. (Those new costs will derive from "universal" coverage, from children being covered under parents' policies up to age 26, and their inability to discontinue policies after claims reach a predetermined maximum.)
So long as insurance companies continue to have a “level playing field” (meaning their competitors are facing the same mandatory changes in coverage as they are), those companies will continue to do just fine, calculating costs, adding a profit margin into their product, monitoring claims, and adjusting premiums as necessary. So long as they do not face a "public-option", government owned and operated competitor, insurance companies can continue to be profitable. (By the way, health insurance company profits have accounted for approximately three percent of the total cost of healthcare in the country.)
How will pharmaceutical companies fare? Drug companies agreed in advance to offer an $80 billion price break under the new health plan. Pro-rated over ten years, that means a "sacrifice" of $8 billion a year in a $300 billion industry. Continued price raises by pharmaceutical companies can easily nullify the "loss". However, problems of another sort pose a much bigger threat to the pharmaceutical industry. There is a dearth of new drugs moving through the research and approval "pipeline", while many blockbuster drugs are due to come off their patent protection in coming years.
What about the auto makers, their suppliers, and other heavy manufacturing companies? How will Obama Care affect their future? Eventually, through sheer passage of time, manufacturers will be relieved of the heavy burden of lifetime health care for their retirees. In fact, two of the three giant U.S. carmakers have already shed these responsibilities through bankruptcy, with many suppliers having done the same. Other, more paternalistic large companies will also find relief from some of their health care burdens. Still, employee benefits and compensation are unlikely to undergo radical changes.
It's important for investors to keep in mind that actual universal health care, along with its much higher costs, does not start until the year 2014. There are one presidential and two Congressional elections between now and then, and one way or another, there are certain to be changes that come about due to these elections.
The stock market seems to be taking a “wait and see” attitude. Perhaps we should do the same.
|
| |
| |
______________________________________________
| |
Click To Print This BLOG
