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Healthcare
Reform's Winners Nobody's Talking About |
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The debate has
been raging since President Obama inked the new law on March 23rd... is
the new law good, or bad, for healthcare stocks, and which
industries stand to win or lose?
 So
far, most pharmaceutical companies and hospitals have been deemed to be
net beneficiaries, while insurers will probably be facing more liabilities
despite a massive inflow of new customers. Too bad the discussion completely
leaves out the only companies that are more certain to benefit from the
reform overhaul.
Wondering
what that group is? Here's a clue... when a legislative act is 2000
pages long, it's going to create a mountain of red tape, procedures, and
paperwork for the companies subject to the bill's requirements. Now,
somebody's
absolutely got to help the insurance companies and healthcare providers
do something they don't do well enough already.... which is manage
the billing, collection, reimbursement, waste, and loss aspects of the
new era in healthcare.
In other words,
healthcare information services companies will see more net benefit from
President Obama's reform than any other healthcare industry. Since
nobody else is talking about them, we will.
A
quick run-down of the major pressures, by industry, is in order.
Insurers:
More customers may mean more revenue, but not necessarily more profit.
When an additional
32 million paying customer are enrolled in the soon-to-be-required coverage,
insurance companies will see a better top line. But, with the government
dictating how, where, and whom insurance companies will cover, the allowed
premiums may not be enough to cover reimbursement expenses any longer.
One stark example
is Humana (NYSE:HUM), which has built a big business around its Medicare
Advantage plans. With a proposed $200 billion cut in government payments
to Medicare Advantage plan providers, Humana may find itself trapped between
a fiscal rock and a hard place.
Bottom line?
It's all about expense management from this point forward.
 Hospitals:
I think Tenet Healthcare (NYSE:THC) is a prime example of the scope of
relief that healthcare reform will bring to hospitals. Between the 50 or
so hospitals it runs, it eats $1 million every day due to uninsured and
non-paying patients. For comparison, that's 4% of last year's revenue,
and about 200% of last year's earnings. Huge.
That being said,
though the reform will increase the number of insured Americans by about
15%, there's a good chance this last 15% of people may create proportionally
more than 15% of those seeking treatment. Hospital administrative staffing
levels may by inadequate by 2014, adding to hospitals' costs.
Pharmaceuticals:
More
insured people means more potential customers, which bodes well for all
drug companies.Plus, the new legislation didn't really do anything to foster
international competition, or even push for the lowered costs offered by
more generic drugs. That's good news for big pharma.
On the flipside,
the bill will also incur about $80 billion in fees over the next ten years
- to be paid by drug makers - by forcing more discounts (via Medicare
D) and larger Medicaid rebates. Overall, the upside and downside nets out
to a wash.
There was one
group with the pharmaceutical arena that did get some big-time help
though.... biotechs that make so-called 'biologics', or cell-based therapies.
Now, these companies are guaranteed 12 years of marketing exclusivity for
any drugs they make.
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Putting
Two and Two Together |
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Though probably
not so much with the pharmaceutical industry, the healthcare reform's requirements
are apt to be a logistical nightmare for hospitals and insurance companies....
a healthcare system that already loses about $700 billion each year
due to fraud, waste, and abuse.
How's that
happen? Sheer size and excessive complexity. The loopholes and potential
abuse packed into a 2000 page bill will only make this number bigger.
 More
than that though, the new laws were specifically built to pass as much
cost along to the plans and providers (i.e. shrink margins) as possible...
the last thing either industry needed right now.
The solution
to the problem pretty much became a requirement on Tuesday, when
the reform bill became law. In order to preserve profits, these companies
are going to have to bring in the professionals to make their whole operation
more streamlined and less wasteful. While most of those companies are focusing
on the hospital and billing side of the table, slowly but surely the push
for more efficient insurance is putting some attention on the insurers
themselves, and managing their risks.
At the top of
the list of the healthcare IT industry's companies is Emdeon (NYSE:EM).
Though known mostly as a billing and payment cycle management organization,
Emdeon actually has its hand in every step of the patient-care process.
Better still, the company is profitable, and is the beneficiary of a recurring
revenue model. Top and bottom lime growth will be primarily be fueled the
acquisition of new clients.... which President Obama just made easier on
Tuesday.
Mediware Information
Systems (NASDAQ:MEDW) is another solid player in the healthcare-management-and-efficiency
game. It's beat earnings estimates in its last two quarters, is profitable,
and lacks any analyst coverage.... yet.
Quality Systems
Inc. (NASDAQ:QSII) and Cerner Corp. (NASDAQ:CERN) are also both
quality names in the healthcare IT space. Either is a little pricey by
most standards, with P/E ratios approaching 40. But, the quality of earnings
- and the projected growth - may command something of a premium.
The bulk of
the companies in the healthcare-efficiency space stand to benefit from
the new law though. Indeed, the complexity of the healthcare overhaul
and the need to preserve profits almost makes the services these companies
offer an outright necessity.
Just something
to think about while everyone else is talking in circles.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
