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According to the Congressional Budget Office (CBO), a federal agency within the Legislative Branch of the Federal Government charged with providing Congress with objective, nonpartisan, and timely analyses to aid in economic and budgetary decisions on the wide array of programs covered by the federal budget, the “federal budget is on an unsustainable path, primarily because of the rising cost of health care.” Today, according to many sources, spending on health care by all Americans represent approximately 17% of our national output as represented by the Gross Domestic Product. Furthermore, the number of individuals (Americans as well as illegal aliens) that are uninsured who reside in the United States is expected to increase from 45 million today to approximately 54 million ten years from now and the federal share of Medicare and Medicaid are expected to increase from its current level of four percent today to nearly six percent in 2019.
Clearly, there needs to be some reform to our health care system and there appears to be some agreement between the Democrats and the Republicans on the need for providing coverage to all Americans, although the definition of “American” is under debate. Should the plan cover those individuals here illegally or not?
There also appears to be some common ground regarding the requirement that private insurers offer basic coverage to all without regard to preexisting conditions. Both sides of the political aisle also appear to be in agreement regarding subsidizing those individuals that cannot afford the insurance. However, there is disagreement on how this will be paid for. In his speech this past Wednesday President Obama pledged that he would not sign any health care legislation “that adds even one dime to our deficit over the next decade.” However, this will most likely be accomplished by further taxing those that earn above a certain threshold rather than the cost-cutting scenario outlined by the President.
A final point of agreement pertains to the potential for allowing individuals to purchase health insurance across state lines. Although currently not available, should this be changed it would most likely increase competition thereby bringing down costs.
Arguably, this is where much of the agreement between the Obama Administration and the Democrats versus the Republicans ends. Generally speaking the former advocates a Public Option, one similar to Medicare and Medicaid while the latter favors a private remedy.
THE BOTTOM LINE – As fiscally conservative individuals, we believe that a remedy that includes the private sector and excludes a public option is preferable. However, keeping in mind that our job is to identify areas of potential for profits in the stock market, we will table our views and concentrate on what the most likely outcome might be as a result of this debate. We believe that some sort of public option will be included in health care reform resulting in an erosion of profit margins for most health care providers including equipment manufacturers. Therefore, given the level of uncertainty as to how health care reform will play out, we would recommend an underweighting of the sector with three exceptions, large-cap, profitable biotechnology companies, pharmacy benefit managers and medical record providers.