The Guest Blog

Farrell: The Health Care Bill & Stocks We Like

Beat the Clock was a 1950's game show where couples tried to complete stunts within a certain time limit for prizes. It stayed on TV in one form or another until 1980 or so. It was a simple game and a classic of early American TV. I remember the host was Bud Collyer. But wait- it has not gone away. It only moved over to the US Senate where if you know how, you can compete for far grander prizes than TV ever offered.

Senator Ben Nelson of Nebraska has true conviction regarding his abortion views and was troubled by the language in the bill the Senate looked set to pass reforming health care in America.

He was holding out.

The bill would extend health benefits by, says the New York Times, "Expanding Medicaid and providing subsidies to help moderate income people buy private insurance. It would require nearly all Americans to obtain insurance or pay financial penalties for failing to do so." In place of the fiercely debated "public option" the Senate bill would create at least two national insurance plans modeled after those offered Federal workers (Senators included.) There is a long-term-care insurance program. It also bars insurance companies from denying coverage for pre-existing conditions and limits how much extra a company can charge due to age (I think I like that one.)

All this will cost, says the nonpartisan Congressional Budget office, $871 billion over ten years.

I love the exactitude of $871 billion.

Not $870, or "about $900", but no, it's $871 to the million.

This will be paid for by new taxes and fees and reductions in government spending, especially Medicare. I heard on a Sunday talk show that the Medicare savings will be over $400 billion. (Why don't I believe that will ever happen?) Senator Nelson got the language regarding abortion restrictions but he also got an increase in Federal grants to cover a Medicaid expansion in his state of Nebraska. Only Nebraska got this special extension. He also won an exemption from an insurance tax for Mutual of Omaha. He was not the only one, though. Senator Mary Landrieu of Louisiana obtained an extra $300 million in Medicaid funds for her state for being open minded enough to be convinced of the bill's merits. Waiting to the 12th hour when the administration has its mind set on getting a bill passed this year is a good time to play Beat the Clock. I thought this was the "Greatest deliberative body in history." Maybe it is. Politics is the art of the possible but it does feel a bit disappointing to read the fine print.

Healthcare coverage and the hastle of forms

There is nothing in this bill that changes our views at Soleil regarding the health care stocks we have been recommending.

A.J. Rice still likes the hospital sector (among others.) The recent COBRA extension (contained oddly enough in a defense appropriation bill) takes away the psychological weight if nothing else that might have been impacting the stocks. Community Health , Universal Health Services and Lifepoint (all buy rated) are among the names he favors. Manoj Garg continues to like Pfizer (buy rated). There was no allowance for reimportation of drugs from Canada in the bill (although it wouldn't have happened anyway since the pharma companies wouldn't have sold the drugs to Canada to be reimported!) But Pfizer recently raised its dividend and trades at only 8 times this year's earnings.

One stock we continue to be cautious about in the general health area is Baxter (BAX; hold rated.) Junaid Husain is concerned about inventory levels and sales for IVIG. That stands for intravenous immunoglobin. IVIG is given as a plasma protein replacement therapy for immune deficient patients who have decreased or abolished antibody production capabilities. It's administered to maintain adequate antibody levels to prevent infections. It is routinely used for immune deficiencies, inflammatory and autoimmune diseases and acute infections. About 11% of Baxter's sales are in this product.

Junaid recently checked in with the management team from Canadian based IVIG manufacturer Cangene Corporation (CNJ.TO-not rated) to get a read on the market for IG products. That management acknowledged IVIG supply is higher than in years past. Junaid thinks investors should watch their WinRho product. They are partnered with Baxter on that product and in times of tight IVIG supply Baxter has sold WinRho as a stand-in. Cangene says they have noticed softening WinRho sales, presumably because of greater IVIG supply. Contrary to market consensus Junaid is worried about demand for IVIG softening, inventories growing, and the threat of prices coming down in 2010, thus his hold rating on Baxter.

Stocks Mentioned Here

A couple more sports anecdotes:

Upon hearing Joe Jacobi of the Washington Redskins say "I'd run over my own mother to win the Superbowl," Matt Millen of the Oakland Raiders said: "To win, I'd run over Joe's mom too."

Chuck Nevitt, North Carolina State Basketball player, explaining to coach Jim Valvano why he appeared nervous at practice: "My sister is expecting a baby and I don't know if I'm going to be an uncle or an aunt." (I wonder if his IQ ever hit room temperature).

Frank Layden, Utah Jazz President, on a former player: "I asked him, Son what is it with you? Is it ignorance or apathy?" he said, "Coach I don't know and I don't care."

In the words of NC State great Charles Shakelford: "I can go to my left or my right, I'm amphibious."

Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.