17th January 2014
Simon Laing, head of US equities at Invesco Perpetual, looks at the impact Obamacare may have on the US healthcare sector in 2014…
Obamacare is the informal name that has been given to the Patient Protection & Affordable Care Act that was signed into law in 2010.
Its major initiative of providing affordable health insurance to all US citizens started rolling out in 2013. But it’s been an inauspicious start with its well-publicised website enrolment problems, preventing most people from taking out coverage.
President Obama has had to enact several temporary measures to improve consumer experience and perception but the whole saga has had a visibly detrimental effect on the popularity ratings for President Obama and the Democrat party. This is particularly uncomfortable for those Democrats who are up for re-election in the November mid-terms.
But these are all teething problems and we would suggest that in a year’s time they will largely be forgotten and by that stage the equity market will be firmly dealing with the implications of what Obamacare means for companies.
In the short-term, we believe it is all about insurance coverage. According to Deutsche Bank figures, there are roughly 55m uninsured people (out of a population of c.314m) in the US who will become eligible to receive insurance either from the government Medicare programme, the state Medicaid programme (if the State has opted in) or from their employer. Indeed, it will eventually become mandatory for everyone to carry insurance.
The immediate beneficiaries will be the hospitals. Typically 20% of patients who are admitted to the emergency room are uninsured and so bad debts are huge in the sector. With insurance coverage improving, bad debts will decline and profitability should rise.
For health insurance companies it is a little trickier as it has yet to be seen how profitable it will be to cover these extra lives. The first enrollers are likely to be those that are in need of immediate care and are therefore likely to be high cost customers. This adverse selection could eliminate the benefit of any revenue upside.
Other areas of healthcare may benefit a little from increased volumes of procedures but they also face a government tax to help fund the cost of Obamacare to the government (the medical device tax would be an example of this).
What must not be forgotten though are the longer-term storm clouds in healthcare, representing the government’s long-term funding of its Medicare programme (insurance for the elderly and disabled). As the population ages, and as health care costs continue to rise, the programme will become woefully underfunded. The US spends nearly 18% of its GDP on healthcare, much more than other Western countries (Figure 1). And the largest cost in the healthcare system is hospitals. So as we look to the future beyond Obamacare, we look to be entering an environment of increasing pressure to reduce healthcare costs and there are only a few ways to do this.
Reducing coverage looks unlikely given Obamacare has done the exact opposite. Reducing prices the government pays for services looks a certainty (and we are seeing pressure in some areas already, such as lab testing). Increasing efficiency in hospitals such that a US$ spent goes a longer way. This latter point has been a focus from an IT perspective as the government offered a stimulus programme to encourage updates of hospital and physician IT systems (for instance Electronic Health Records).
Obamacare is important but longer-term, funding this increased healthcare liability will, in our opinion, have a more profound impact on the sector. However, forecasting when that bell tolls is very difficult. From an investment perspective, we believe focusing on companies that are helping take the cost out of the healthcare system will be paramount.
Healthcare spending as a percentage of GDP, 1960-2011
Source: OECD, Health Data 2013, November 2013.