TUESDAY MARCH 23, 2010

Healtcare Impact

The passage in the House of the Healthcare bill was met with a modest rally in stocks yesterday.  The market wandered aimlessly for most of the day and finished up 43 points.  Interestingly, the healthcare stocks were up as well.  Does the passage of the bill mean it is time to buy healthcare stocks?  Not necessarily.

It is hard to measure the healthcare stocks reaction yesterday.  Were they up because the heathcare bill is great for them or up because the outcome wasn't as bad as it could have been?  I don't know.  The upfront justification for the rise in heathcare stocks is that the bill will create more customers.  Clearly, 31 million people will now have health insurance subsidized by taxpayers.  That's plenty of new customers for the health insurers.  And these individuals will now have insurance to pay for their prescription drugs, so the pharma sector did well yesterday as well.  So, in the short run, theheathcare stocks may fair well.

However, the question remains whether they can take on these new customers in a profitable way.  The main issue I have with the bill is on the financial side.  10 years of revenues vs. 6 years of cost.  $500 billion is savings from "waste and fraud."  Are we really suppose to expect the bureaucrats that allowed this waste and fraud in the first place will now sharpen their pencils and wretch it out of the system?  There is no tort reform.  Raising capital gains taxation has rarely generated the targeted revenue as investors anticipate the change and take action before the tax increase.  In short, the new bill does little to contain costs and will likely increase the cost of healthcare.  If this does happen, the healthcare stocks will find themselves in the political cross hairs and will be demonized again.  And since the government is paying for these new customers, the regulators will have much more to say about pricing of drugs and policies.

The healthcare stocks may enjoy a nice run on the prospect of more customers.  However, in the long run, this innovative industry will begin to look more like the regulated utility industry.   

POSTED AT 1899-12-30 08:42:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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