Healthcare Reform: A Potential Profit Disaster
Founder and Chairman of the DWM Investment Committee at Destination Wealth Management.
There is no doubt that something has to be done about the rising cost of health care in the United States. The status quo is a recipe for disaster and, considering the gigantic federal deficit, the last thing the United States needs is an even larger anchor on fiscal health.
The Obama administration has decided it's time to pursue a goal often talked about but never implemented; universal mandated healthcare for all citizens. This concept is controversial as some see it as another step towards socialism. Others herald this goal as a major step forward for healthcare parity regardless of economic standing.
The debate rages on and will heat up over the next several months. Regardless of your perspective, the resulting investment consequences will be huge and the time to consider the potential investment impact from healthcare reform is now. Not being proactive as an investor could be a very costly mistake.
While the impact on investors will depend on the extent of the changes implemented, there is no doubt that reform will alter the investing landscape. And frankly, there are few silver linings for private healthcare companies and will likely cause a massive reset of private company profit margins.
Major risks for healthcare investors include price controls and government programs subsidized to compete with private companies. Insurance company providers like Blue Cross could find their profit margins undercut if the government subsidizes a less expensive health plan alternative.
Big pharmaceutical companies like Merck could face price controls if the government attempts to reign in drug-related costs. Hospitals like HCA could face more pressure on their bottom line if they are required to take less daily payments for health care services. Even biotech companies like Amgen could face challenges if profit potential is limited by the government.
Will there be winners in the healthcare sector? Perhaps. With more people covered, the total demand for services will be greater and that could increase revenue significantly; economy of scale is a good thing.
Companies with the strongest balance sheets will likely have an advantage over less capitalized, leveraged rivals. Companies that specialize in information processing like Allscripts-Misys Healthcare Solutions could reap a huge windfall (yes.....more paperwork!). Generic drug makers like Mylan could see larger demand as branded drugs lose favor.
Being nimble as an investor and adjusting as conditions dictate is a necessary and important strategy. And with healthcare reform coming, nimble is what you will need to be.
As is always the case, the details will tell the full story. Until then, we can only speculate on what the world might look like for healthcare investors going forward. Suffice it to say, the landscape is about to change and, with a new era of government intervention upon us, the result could gigantic.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). Michael oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.