Health care investing in a ‘post-Obamacare’ world

President Trump announced on October 16 that the Affordable Care Act, commonly known as Obamacare, is “dead.” How should investors interpret this new level of uncertainty introduced into the health care system?

First, it’s important to clarify that Obamacare is still the law of the land and that taxpayers will pay a penalty if they do not have insurance as the law mandates. But the law has been thrown into disarray, to be sure. Here’s how. Last week, Trump signed an executive order bolstering short-term insurance policies, and later that day announced the end of $7 billion in cost-sharing subsidy payments to health insurance companies. Bipartisan congressional efforts to fix the subsidy program notwithstanding, this is expected to raise premiums in the individual insurance market and have untold effects on industries in the health care sector, which makes up one sixth of the U.S. economy.

Hospitals and insurers could take a hit
On a structural basis, this news looks bad for hospitals first. Hospital groups could see their bad debts go up if more people opt for “skinny” plans, and traffic could be driven lower very quickly. If behavioral health, substance abuse care, and other essential health benefits are not included in those plans, they could see a marked drop in admissions and revenues, as well.

The news is more of a mixed bag for insurance companies. In the short term, the uncertainty will likely mean volatility. The best barometer for the potential destabilization of the executive order was the price action on Centene Health (CNC). CNC, one of the few remaining health insurers that had pressed forward into the health care exchanges as others pulled out, fell as much as 11 percent to $83.56 per share, the biggest slide since November of last year. The end to the subsidy program could wreak havoc on its bottom line.

The next move, according to Azzad Ethical Fund Portfolio Manager Christian Greiner, CFA®, is to see if states increase their subsidies, and of course, find out what insurers’ rate hikes will look like without subsidies. “States have been offering incremental price changes of 10-20% to offset the loss of these cost sharing subsidies in 2018. If we don’t get a legislative solution, in 2019 and beyond, we could see a mass exodus of insurers from the exchanges.”*

Impact on other health care industries
Longer term, if the action results in fewer people seeking care, the news could prove bad for health care distributors and device makers. “People could put off going to the doctor, start using the emergency room as primary care again, and put off having certain procedures because of lack of affordable insurance or prohibitive deductibles,” says Greiner.

The effect on pharmaceutical companies and demand for drugs is less clear. This is a space that is already facing dramatic disruption thanks to a new possible market entrant, Amazon.com.

Greiner says that dramatic changes in the health care system like these could prompt a wave of consolidation among traditional health care buyers–everyone from insurers to managed care associations to hospital/physician groups. “You could see these new large customers pressuring drug makers for concessions on pricing even more. Once you get into matters of pricing, you also have to worry about the effects on biotechs and other medical science innovators,” he says.

“For drugs, the best example to think about is being the approved formulary for a certain large PPO or HMO. What would you give up on price to get that volume? This will also place pressure on distributors of equipment and consumables (little things like gauze, surgical tools, and kits, or big things like beds and imaging machinery).

In short: economies of scale are about to become even more important in health care.

Implementing Trump’s directive will likely require new regulations, and in the meantime, lawsuits challenging the order have already been launched and will likely continue apace. But disruption in the health care sector is far from finished.

*The Azzad Ethical Fund does not invest in insurers or hospital groups.

This article may contain forward looking statements including statements regarding our current expectations. Readers are cautioned not to place undue reliance on these forward looking statements. Forecasts are subject to uncertainty. Past performance is not a reliable indication of future performance.

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