Who will be the winners and losers from Obama’s US healthcare reform legislation?
US President Franklin D. Roosevelt tried it in 1935. The Clinton administration attempted it again in 1993 and failed in a spectacular fashion. Now another highly popular Democratic leader, President Obama, has made healthcare reform the centrepiece of his presidency and with the invocation of some arcane US legislative manoeuvring, a degree of reform seems inevitable. Speaking from San Francisco, Michael Dauchot, M.D. of RCM, a global asset manager and company of Allianz Global Investors, looks at the likely winners and losers from this legislation. RCM is the manager of Allianz Global Investors‘ equity funds, including the award-winning Allianz RCM US Equity fund*. “Two subsectors emerged as clear beneficiaries before healthcare reform negotiations even got underway: the life science ‘tools’ companies, and the healthcare information technology space. Part of the economic recovery package enacted in February 2009 called for increased funding of National Institutes of Health (NIH) research and healthcare information technologies (IT). That provided a much needed boost to the tools space, which was otherwise facing continued contraction in industry research & development spending from consolidation. Similarly, the stimulus package boosted healthcare IT spending, an industry that Obama viewed as playing a critical role in bending the healthcare cost curve. Many of the companies in each of these areas immediately rallied, while others—like McKesson (US healthcare services and information technology company ranked on the FORTUNE 500**)—were slower to react and, in our opinion, offer a compelling investment opportunity.“In our view, McKesson is uniquely positioned, because the company is first and foremost a drug wholesaler and a member of an industry that stands to benefit from increasing coverage, a central tenet of healthcare reform. With government mediation off the table, those companies that gain from the simple expansion of the insurance pool probably emerge as the clear winners of reform. Put simply, expanded coverage is likely to bring more of the population into the healthcare distribution chain, which almost by definition, fuels growth in pharmacy benefit managers (PBMs) and drug wholesalers.
“We think that the group that stands to lose the most from the Democrat’s initial proposal is the managed care organizations (MCOs), who faced the possibility of competing with a government-funded public plan that would have almost certainly offered lower premiums. Throughout his campaign and presidency, Obama decried the ability of MCOs to expand profits by ‘cherry picking’, which left many patients with exorbitant medical bills, and, in some cases, no insurance at all.
“Ultimately, the United States Congress settled on the creation of an ‘exchange’ that would offer private healthcare insurance in a transparent and competitive market, and one that would prevent insurers from denying care to anyone for pre-existing conditions. The quid pro quo for MCOs is likely less profit per patient, but more patients—particularly young and healthy ones—under coverage.
“The quid pro quo dealt to the MCO’s will to a lesser extent be felt by other major healthcare subsectors. The pharmaceutical industry will pay excise taxes and offer deeper discounts to seniors, while the device industry’s outlay could be limited to the former. In both cases, there is the expectation that some of those incremental costs will probably be offset by the creation of a larger US patient pool, although we estimate a more favourable outcome for the drug industry. Overall, in our opinion, the biotechnology industry emerges virtually unscathed, though there continues to be some last-minute discussion on easing the introduction of so-called biosimilars***.
“In sum, we anticipate that by sometime in second quarter 2010, legislation could be passed that over time will insure an additional 35 million Americans and thus fuel unit growth across all healthcare subsectors, albeit at incrementally lower profit rates. We view MCOs as generally undervalued due to exaggerated fears, while those companies in the distribution chain are on the cusp of an under-appreciated acceleration in growth as the insurance pool expands.”
* Seung Minn, manager of the Allianz RCM US Equity fund, was awarded two gold medals, by Sauren Fund Research: 2009.
** The Fortune 500 is an annual list compiled and published by Fortune magazine that ranks the top 500 U.S. closely held and public corporations as ranked by their gross revenue after adjustments.
*** Biosimilars, or Follow-on biologics, are terms used to describe officially approved new versions of biopharmaceutical products, following patent expiry.
