Analysts assess winners and losers in health care reform

What's good for Medicaid subcontractors could be bad for regional insurers, others

Jul 26, 2009 @ 12:01 am

By Darla Mercado

Depending on the outcome of health care reform, investment opportunities could be found in a variety of related sectors, including pharmaceuticals, biotechnology and even certain insurers. The much-ballyhooed public-health option in the proposed Affordable Health Choices Act will likely give way to three possible scenarios to widen coverage: an expansion of the Medicaid program, a program that allows the federal government to outsource care to commercial carriers or a non-profit health care cooperative organization, analysts said. If Medicaid, a state-administered program, is expanded to cover more of the uninsured, companies that are subcontracted to provide that coverage — such as Amerigroup Corp. (AGP) and Centene Corp. (CNC) — would benefit, said Dave Shove, a senior health analyst at BMO Capital Markets Corp. in New York. “The stimulus bill threw a lot of money at Medicaid, but that's an area that's less politically sensitive,” said Steve Shubitz, an analyst at Edward D. Jones & Co. LP in St. Louis. “Nobody is talking about getting rid of that.” There are likely to be cuts in Medicare reimbursement rates, hurting companies that focus on that service, including HealthSpring Inc. (HS) and Humana Inc. (HUM), analysts said. Another possibility, which would include having a major commercial public plan that would allow private insurers to cover more individuals, would benefit large managed-care companies because their existing provider networks allow them to get good discounts for physicians and hospitals, Mr. Shubitz said. These companies can also spread their administrative costs across their consumer base, he said. Successful carriers must also be able to handle the cost of the technology necessary for disease management, claims processing and care coordination, Mr. Shubitz said. Only the largest insurers, such as Aetna Inc. (AET), WellPoint Inc. (WPT) and UnitedHealth Group Inc. (UNH), could do that, he said. Potential losers under the scenario of a major commercial public plan include small regional insurers, such as Health Net Inc. (HNT), because they lack the scale and networks to survive, Mr. Shubitz said. Finally, if the public plan were crafted to act like a co-op plan similar to the state Blue Cross Blue Shield organizations, the risks to the insurance industry would be smaller, according to Jason Gurda, director of health care facilities and analyst at Leerink Swann LLC in Boston. Those plans are intended to meet broad needs, and commercial market carriers can compete with them, he said. Analysts don't believe that a true public option, in which the government itself competes with commercial carriers, is a likely outcome. But if government-sponsored health care comes to pass, however, managed-care companies will suffer, they said. “It would be very hard to pick a winner if there were a true public-plan option,” said Matt Coffina, a stock analyst at Morningstar Inc. of Chicago. Still, analysts and portfolio managers said that other areas could benefit from the influx of newly insured people, such as pharmaceuticals, biotech firms and medical supply companies. Mr. Coffina singled out pharmaceuticals and medical-supply distributors AmerisourceBergen Corp. (ABC), McKesson Corp. (MCK) and PSS World Medical Inc. (PSSI) as stocks that could benefit from more widespread health insurance coverage as long as the government doesn't pressure companies to reduce prices.

The health care reform discussion and its effect on related sectors are reminiscent of the 1990s, when there were attractive bargains in the pharmaceutical sector, said Craig Callahan, founder and president of Icon Advisers Inc. in Greenwood Village, Colo.

The stocks aren't the steal as they were 15 years ago, but they have potential, he said.

“It's not quite the bargain, but there is a good combination of value and strength,” Mr. Callahan said.

He has holdings in Medicis Pharmaceutical Corp. (MRX), a Scottsdale, Ariz., specialty pharmaceutical company that makes Restylane, a facial wrinkle treatment.

Biotech investments are also possible contenders for growth, particularly if their treatments are unique, said James A. Reed II, lead portfolio manager of the UMB Scout Stock Fund in Kansas City, Mo. He has his eye on Genzyme Corp. (GENZ), a Cambridge, Mass.-based manufacturer of treatments for kidney disease and cancer.

“From the investor's perspective, the more complex the product is, the better — and the more difficult it is for competitors to come in and become certified to make the product,” he said.

Mr. Reed also likes Cerner Corp. (CERN), a Kansas City, Mo., health information technology firm, which he anticipates will benefit when record keeping moves to digital from paper.

Another believer in biotech is Michael Krause, president of AltaVista Research LLC in New York, who pointed to the iShares Nasdaq Biotechnology exchange traded fund (IBB), offered by Barclays Global Investors of San Francisco.

“It's a classic venture capital investment, and they're starting to pay off at last,” he said.

Still, how far biotech companies will go depends on how much power the government wields in setting the cost of drugs. “Obviously, there's the open question of whether government meddling and declaring what they pay for drugs can quash the innovation before it gets under way,” Mr. Krause said.

E-mail Darla Mercado at dmercado@investmentnews.com.

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