Can You Profit From Healthcare Reform While The Debate Goes On? + Vic Wisemann’s Thoughts on: AET, HUM, CI, UNH, MDT, JNJ, DGX And LH
 InvestorsObserver Featured Contributor Vic Wisemann |
Summer is winding down. Vacations are over, the beaches are nearly empty, life guards are looking for indoor jobs and Congress is heading back to work. I know many see that as a contradiction in terms, but Congress does have a great deal of work that must be done in the coming months. Mid-term elections are just 14 months away and work on re-election campaigns will soon dominate schedules, making committee meetings and anything but major votes a secondary consideration.
Into this frenzied bed of activity sits healthcare reform. The issue is huge, and it has taken the industries involved decades to build the institutions about to be torn down. Almost everyone involved has a seat at the table including the government, patients, doctors and employers. The owners of the affected companies, however, are conspicuously absent.
Like every other industry, healthcare depends on Wall Street for much of its capital needs. Growth requires investment, investment requires capital, and the financial markets are the spigot from which capital flows. At $2.4 trillion, the total annual spent on healthcare is well-publicized. Few, however, consider that this expenditure translates into a market capitalization just under $2 trillion. Within the S&P 500, only information technology and financials boast higher total values. The 52 companies comprising the healthcare section of the index equal 13.5% of the index's total value.
In July, four of the congressional committees responsible for health-care legislation approved proposals. The three House committees still have to merge those bills for a House vote. The Senate has one committee bill proposed, but is still waiting for the Finance Committee to release its recommendations.
Read on to see how you can profit from healthcare reform, even if you are not in Congress.
FREE for 90 days: Get the InvestorsKeyhole Service and our other premium investor services. Plus Over $1,000 In FREE Bonuses! CLICK HERE to begin your 90 DAYS FREE. We can make this 90 day FREE offer because we are confident you will find our service an essential part of your investing toolkit and stay a subscriber for many years to come. Our biggest risk is that we do find people cancel their subscriptions when they move to their own private islands without internet access. |
Much of the debate is over how to pay the estimated $1 trillion price tag. There also is disagreement over a public option for coverage, and how much businesses would have to contribute if they didn't provide coverage to workers. What's more, doctors are concerned because much of the cost savings is supposed to come from lower Medicare reimbursements for certain services.
Despite the confusion and contentious atmosphere, there are some issues that most sides appear to agree on and many expect some legislation by the end of the year. Since it appears some form of reform will be passed, what can investors do to protect their portfolios without losing their shirts?
Companies with the biggest targets on their backs are the insurance and pharmaceutical companies. A health-care proposal by Senate Finance Committee Chairman Max Baucus would impose a $6 billion annual fee on health insurers, according to a summary of the proposal. Other "pay-for" provisions in the plan include a $2.3 billion annual fee on pharmaceutical companies, a $4 billion annual fee on medical device makers and a $750 million annual fee on clinical laboratory companies - all of which would begin in 2010.
A spokesman for the America's Health Insurance Plans, or AHIP, trade group said in a statement that the insurance fee proposals will only make it harder for families and small businesses to afford coverage. Members of AHIP include Aetna Inc. (AET), Humana Inc. (HUM), CIGNA Corp. (CI) and UnitedHealth Group Inc. (UNH). The annual fee represents 20 to 25 percent of the health insurance industry's 2008 pre-tax profit and 40 percent of the after-tax profit.
Medical device makers and lab test providers also face fees under the Baucus plan. Device makers such as Medtronic Inc (MDT) and Johnson & Johnson Inc (JNJ) would pay fees totaling $4 billion across the industry each year starting in 2010.
The additional costs would most likely be passed on, like all costs of production, as higher prices, according to Brett Loper, a vice president for the industry group Advamed. "All of it is increasing the cost of healthcare, which is the exact opposite of what the president has suggested is the principle reason for the health reform effort."
Lab test makers such as Quest Diagnostics (DGX) and Laboratory Corporation of America (LH) would see $750 million in annual fees under the Baucus proposal. American Clinical Laboratory Association President Alan Mertz said the fees were equivalent to a 10 percent cut to Medicare reimbursements and were very disproportionate to the size of the lab industry.
This is just from one of the proposals floating around Congress, but it gives a glimpse into the crystal ball of reform finance. No matter how you slice it, reform is not free and whether or not there is a low cost government option for consumers, there will be a high cost government bureaucracy to administer whatever plan they come up with.
Given the uncertainties of the situation and the timeframe of potential closure, a short term bearish trade seems to be in order. A bear call credit spread will generate cash when the trade is opened and, as long as the stock stays below the sold call strike price at expiration, no further action is required by the investor. If the stock shoots up, you still have the option of closing the position to minimize any losses.
Looking at the companies involved, CIGNA Corp. (CI) is an excellent candidate. The company is one of the larger insurers resulting in a great deal of premium in its option prices. In addition, the stock reports earnings in November, adding more volatility to the October expiring options.
For a hedged trade on CI, you may want to consider an October 35/40 bear call spread for a 45 cent credit. The trade results in a 9.9% return over less than 35 days, and the stock has to rise over 14% to cause the position to lose money.
This type of trade in this industry at this time does carry a bit of risk. Be certain any trade you enter fits into your personal risk/reward profile before you put your money at risk. Do your homework, stick to your plan, and try to have some fun.
If you have any additional thoughts, ideas or ways to make healthcare work better, please e-mail me at vwisemann@InvestorsObserver.com.
FREE for 90 days: Get the InvestorsKeyhole Service and our other premium investor services. Plus Over $1,000 In FREE Bonuses! CLICK HERE to begin your 90 DAYS FREE. We can make this 90 day FREE offer because we are confident you will find our service an essential part of your investing toolkit and stay a subscriber for many years to come. Our biggest risk is that we do find people cancel their subscriptions when they move to their own private islands without internet access. |