Health Care Reform and Your Health Stocks

Independent Variable: The Economy

The health care industry will see reform amid, and in light of, a dimming economy. "In the next few years, the health care sector as a whole may be pressured significantly both by a recession and possibility of reform by the Obama administration," says Peter Kolchinsky, Ph. D., portfolio manager at RA Capital Management, a fund focused on health care.

"Already many patients are having to pay for a larger portion of their drugs because of rising co-pays and the introduction by Medicare of the 'doughnut hole'," says Kolchinsky. The doughnut hole is a period during which people with Medicare drug plans have to pay 100% of the cost of their drugs. In 2008, this gap in coverage began after a person's covered medication costs reached $2,700. Medicare Part D beneficiaries remain in the "doughnut hole" until their out-of-pocket costs exceed $4,350.

As a sign of the times, Kolchinsky uses this example: If a patient is on a branded blood-pressure medication called an angiotensin receptor blocker, he or she can't switch to a generic because there aren't any yet. But he's hearing of cases in which patients request to switch to generic angiotensin-converting enzyme inhibitors, a different class of drugs that also lower blood pressure, even though they can cause irritating side effects, such as a cough. "Some patients are willing to suffer a few extra side effects if it means saving hundreds of dollars," he says.

Pair rising health-care costs with continued job losses and attention is likely to turn to structural weakness of the employer-based health care system -- reform is more likely to emerge now, under the Obama administration, than in the past, says Miller Tabak's Funtleyder. There will be pressure to find a better "safety net" for those who don't have or fall out of health insurance coverage.

This sort of initiative is already on the prospective agenda. As mentioned above, last week, Sen. Baucus presented his "Call for Action Health Reform 2009," and in response, Obama aides invited others to weigh in.

What are some implications of universal health-care coverage? "The government could tell managed-care organizations, 'We will pay you a set fee to cover U.S. citizens -- most likely to pressure margins,' " says Ferayorni. "If universal health care is crafted without managed-care companies in mind, the government will crowd out their participation, which in its extreme has those companies disappearing."

Keep in mind, though, any sweeping change will not happen overnight. "I expect we'll see legislation, but getting it passed is a different issue," says Funtleyder. "There are a lot of points of view, and it requires a lot of constituencies to buy in -- you'll have to find a legislative piece that keeps enough people happy."

Not to mention, "One obvious dinosaur in the room is that we're in the midst of something bad going on in the economy and we've got to get through that first," says Funtleyder. Until Congress or the president actually proposes and enacts either administrative or legislative changes there will be no impact on companies' P&Ls, he says. "It will be sentiment driving the market."