Obamacare-Proofing Your Portfolio

NEW YORK (TheStreet) -- Whether you like it or hate it, the Affordable Care Act is constitutional, so maybe it's time to adjust your portfolio to this reality.

Having covered the medical beat while the bill was under debate, I can offer you a quick take:

The Supreme Court ruled Obamacare is constitutional, so maybe it's time to adjust your portfolio.

Buy insurers, especially UnitedHealth (UNH). Insurers are the biggest winners here. Margins may be under pressure, but more customers mean more money to play with.
UnitedHealth is the first one to look at because it has the most investments in health IT, through what is now called Optum, combining the former Ingenix unit with Connextions, a health IT consultancy acquired last year.
Data is considered a key to lowering the per-patient cost of care, using electronic health records to bring best practices to physicians and hospitals. The sector got a $19.2 billion boost in the 2009 stimulus, and those who don't take the cash will start being hurt in reimbursements by 2015.
UNH shares fell sharply yesterday, after the Supreme Court ruling, but actually closed higher as the smart money came in.

Buy pharmacists, especially Walgreens (WAG) and CVS Caremark (CVS). There will not be enough first-line doctors to deliver the first-line care called for in the law, and the pharmacists have been gearing up for years with networks of in-store clinics staffed by nurse practitioners and physicians assistants, backed by IT resources and with doctors in the background.
CVS has its MinuteClinic chain, while Walgreens' in-store clinics are called Take Care. Walgreen's is redesigning stores to put a host of health-and-lifestyle services in front of customers while they wait for prescriptions to be filled. CVS stores are more traditional, but the company also owns a pharmacy benefit manager to assure traffic. Walgreen's famously split from the leading PBM, ExpressScripts (ESRX) last year.

Consider hospitals as takeover candidates. The most efficient medical systems, like Intermountain Health and Kaiser, are vertically integrated. That is, insurance is tied to facilities, and the whole group thus has a financial incentive to deliver best practices and lower per-patient costs.
This has been true for over a decade, but it now becomes the key to financial success across the industry. If your health IT system can enforce discipline among doctors and hospitals, doing the obvious first, pushing generic drugs, using best practices and checklists, that per-patient cost is lower.
Over time this will put hospital chains into play for big insurers. And the most financially troubled of the chains may make the best bargains for the big guns. Thus, taking a flyer on, say, Tenet Healthcare (THC), recently upgraded by Wells Fargo, and noted in an article on the US Election News Web site, may pay off for the speculative investor. Just be aggressive and if it gets a take-out offer, push for the company to grab it.

Sell speculative pharmaceuticals like Dendreon (DNDN). The biggest losers in reform will be companies selling expensive cures directly to doctors, many of whom will lose their power to offer such treatments until they are proven.
Dendreon, for instance, offers Provenge for advanced prostate cancer, shown to improve lifespans by just four months at a cost of $93,000 per treatment. Insurers won't buy that, when their financial incentives are geared to lower per-patient costs.
The global pharmaceutical business has long focused on the U.S. because once a treatment is approved it can be sold directly to doctors. In other advanced countries, the health care system demands that such treatments show themselves to be cost-effective before they will pay. That kind of system is coming here, enforced by private insurers, so if the drug you're backing has a high cost you now have a much-higher hurdle to make sales.

I know most TSC readers don't like the new law. Many doubtless hope that a President Romney, who instituted a similar program as governor of Massachusetts in the last decade, will repeal it with a Republican Congress. But even if he does, whatever replaces it will look a lot like what has now been approved. Even if he doesn't, the incentives for big insurers to lower per-patient costs will likely remain.

And there is this consolation. Among the winners will likely be the big health IT companies, the outfits supplying the systems needed to enforce best practices, so a Bush is bound to be one of those winners. That would be Jonathan Bush, a nephew of George H.W., cousin to George W., and CEO of AthenaHealthDIS (ATHN).

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

At the time of publication, the author held no positions in any of the stocks mentioned.