This column was originally published on RealMoney on Aug. 30 at 3:01 p.m. EDT. It's being republished as a bonus for TheStreet.com readers.
"With the Medicare Act of 2003, our government is finally bringing prescription drug coverage to the seniors of America..."
Those words were uttered by President Bush in December 2003, and the ensuing legislation resulted in Medicare's new prescription drug coverage, sometimes called Medicare Part D, which starts on Jan. 1, 2006.
This is a big deal, and it couldn't come at a better time for society, or for the stocks of several companies.
The U.S. currently spends roughly $1.9 trillion on medical care, or more than 15% of GDP, the highest rate in the developed world. And it's only going to get more costly: According to the Centers for Medicare and Medicaid Services, or CMS, total national health care expenditures could top $2 trillion by the end of next year.
While those figures are shocking, the cost of prescription drugs is increasing faster than other components of health care, which is of particular concern as America's population goes gray. People over the age of 65 currently comprise around 15% of the population but account for a full one-third of prescription drug consumption. Imagine, then, the financial impact on the country's health care costs as this demographic grows to 30% of the population in the next decade.
Congress developed Part D to help the 42 million Medicare participants with the cost of prescription drugs. After all, these folks are projected to consume a whopping $1.8 trillion of prescription drugs over the next decade. To curb these costs, an estimated 30 million Medicare patients could enroll in prescription drug insurance plans.
Many seniors will be relieved come January, and that's important. But this is, after all, an investment-oriented Web site, and many companies -- from a variety of different industry groups -- stand to benefit from Medicare's prescription drug plan. Under the timeline set by the federal government, companies can't release details of their individual plans until Oct. 1, 2005.
PBM Revs Its Engines
But one group, pharmacy benefit managers, or PBMs, already is helping ease the costs of prescription drugs. By creating large networks of participating retail and mail-order pharmacies, PBMs use their buying power to secure discounts and drive down drug prices. They also handle the delivery of high-priced specialty drugs that often require special handling, dispensing and administration.
The largest player by market value and revenue is Nashville, Tenn.-based
With Part D on the not-so-distant horizon, it's a good time to be the leading PBM. The opportunity for the industry could be huge: According to the most optimistic estimates, Part D's potential impact could be as high as 10% of the total U.S. expenditure on drugs. According to the CMS, the U.S. will spend $261.8 billion on prescription drugs next year, so 10% of that figure yields a nearly $27 billion opportunity for the industry.
As the only PBM supporting a health plan operating in all 34 geographic regions, Caremark stands to gain the most new Medicare business next year. But even so, it's hard to say for sure just how much Part D will affect the PBM industry. Analysts have not included any revenue from Medicare's upcoming drug benefit into their forecasts, though, so any incremental contribution from Part D will cause estimates to go up. For its part, Caremark says on its Web site, "There is no doubt that its impact will be broadly felt."
Insuring Its Future
Another company -- in an entirely different industry group -- that looks poised to prosper from Part D is
, one of the country's largest medical insurance companies, providing service to 11 million people.
But this is not your father's health insurance company. In fact, health insurance accounts for only about 60% of total sales. In reality, it's more of a diversified health and well-being company, serving more than 55 million Americans in one way or another.
For instance, its Definity Health unit is the national leader in providing consumer-driven benefit plans such as health reimbursement accounts, or HRAs, and health savings accounts, or HSAs. Such plans provide consumers with more choice, flexibility and affordability in the face of rising health care costs.
Another element in the UnitedHealth story -- and the one most impacted by Part D -- is its Ovations business unit, which provides health services for individuals over age 50. As noted above, in the next five years, that demographic will comprise a full one-third of the U.S. population, according to the Small Business Administration.
Part D preparations are already under way. In June, UnitedHealth announced a partnership with the AARP in offering a nationwide Medicare prescription drug insurance plan to the consumer group's nearly 2 million members. UnitedHealth's Ovations unit also has teamed with
as it readies its Medicare Part D Prescription Drug Plan for all 50 states.
In early July, UnitedHealth announced plans to acquire PacifiCare Health Systems for $8.1 billion in cash and stock. As the biggest manager of Medicare health plans, PacifiCare will help bolster the number of participants in UnitedHealth's Medicare insurance plans, from about 300,000 to around 1 million. In fact, Legg Mason analyst Thomas Carroll said, "PacifiCare is largely viewed as the Medicare HMO because it gets 40% of its revenue from Medicare."
Again, it's tough to gauge exactly just how much, in dollar terms, Part D will impact UnitedHealth's financials. That's partly because companies are mostly mum as to the details of their plans until Oct. 1, as mandated by the government. Needless to say, with PacifiCare in tow, UnitedHealth will be a big beneficiary of Part D.
So in sum, Part D will be a big deal for the 42 million Medicare participants. But they're not the only ones who stand to gain when Part D goes into effect in January. Investors can prosper too by focusing on the companies that will reap the plenty of what many consider to be the largest change to Medicare in its 40-year history.
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Charles L. Norton, CFA, is a principal of GNI Capital, Inc., an SEC-registered investment advisor that provides investment management expertise for separately-managed equity, fixed income and ETF portfolios and a hedge fund. In addition, Mr. Norton authors a twice-monthly newsletter, Supernova Stocks, which focuses on investments in market-leading stocks with unique and extraordinary growth potential. Mr. Norton had been a vice president in the equity research department of a New York-based hedge fund, where he also managed separate accounts for high net worth clients. Prior to his experience on the buy side, Mr. Norton worked in the investment banking division of Salomon Smith Barney, where he was an analyst in the health care group, reporting directly to the head of the group. While Mr. Norton cannot provide investment advice or recommendations, he appreciates your feedback;
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