The specter of higher costs continues to hang over the health care sector – a threat that is preventing most health care stocks from benefiting from the new reform package, according to a panel discussion at the Morningstar Investment Conference in Chicago last Thursday.
“Our expectations are that costs will accelerate,” said Kris Jenner, vice president of
T. Rowe Price Group Inc.
Mr. Jenner, a portfolio manager and equity analyst who specializes in the health care industry, was joined on the panel by Andy Acker, manager of the Janus Global Life Sciences Fund Ticker: (JFNAX).
The panel, moderated by Morningstar Inc. health care analyst Damien Conover, focused on some of the shifting dynamics of health care investing, including the high-risk and high-reward potential of several emerging markets.
“The emerging markets represent a green field of opportunities,” Mr. Jenner said. “But don't try this at home. You have to know that this is an away game, and you should leave it to the people who can get to the places like Brazil and China.”
And the panel's assessment of the recently passed health care reform legislation? More work needs to be done. What's more, before any benefits come to consumers or companies in the sector, everything will get more expensive.
“Right now, we're at a crossroads, where the ability to pay for health care will become more difficult,” Mr. Jenner said.
He added that of the three mains objectives of the legislation – insure the uninsured, improve quality and lower costs – the legislation addresses only the first issue.
“There will be a stark realization, five to seven years down the road, of higher costs,” Mr. Jenner said, adding that he expects to see efforts at “health care reform II” this decade to focus on costs.
Mr. Acker's take of the reform legislation was that “it was more health care expansion than reform.”
And because most of the actual reform is not expected to kick in until 2014, Mr. Acker said, “we're getting the stick before the carrot, because in my view, the fees are coming first.”
In terms of investment opportunities, Mr. Acker added: “We still don't know what it will look like for all the players.”
Mr. Jenner laid out the extreme continuum that has hospitals on the winning end because they won't lose as much money to non-paying patients, and medical insurance companies on the losing end.
“Medical insurance companies have no friends anywhere, and that's a bad place to be,” he said.
Medical-insurance companies are “in the cross hairs,” Mr. Jenner said, adding that with the new 2,300-page law containing 1,400 instances of “the secretary shall,” it is clear that the “detail is yet to come.”
On the issue of potential industry
consolidation, neither panelist was particularly enthusiastic about how it creates value for investors.
“The industry has been consolidating for 20 years, but we don't have any good examples, because there are not a lot of examples of where mergers have led to incremental value,” Mr. Jenner said. “Many of the large deals are done out of consideration of current business challenges.”
In terms of areas of investment opportunities, it appears that innovation is still taking place.
Mr. Acker cited HeartWare International Inc. Ticker:(HTWR), a maker of artificial heart pumps, as a “huge growth area.”
Mr. Jenner likes Human Genome Sciences Ticker:(HGSI), which he said is close to developing the first new treatment for Lupus in more than 20 years.
