by Jason Norris, CFA
Senior Vice President of Research
Five to Four The highly anticipated Supreme Court decision on the Affordable Healthcare Act was released Thursday morning. The results surprised most pundits, as well as us. The Court found the law to be constitutional, thus upholding the most controversial provisions of the law, the individual mandate. The political ramifications of this decision won’t be seen until November; however, we immediately saw the market impacts with hospitals and drug distributors rallying, HMOs falling and the rest of the sector showing a mixed response.
The long-term impact of the Court’s decision on the healthcare industry is varied. The largest beneficiaries of the law are hospitals. As more individuals become insured, hospitals will be able to reduce their provisions to bad debts, thus adding to profitability. The impact on HMOs, should be relatively neutral. While the individual mandate will lead to greater membership in HMOs, these additional customers will be lower margin. Additionally, there still may be some people who choose to pay the penalty (tax, as defined by the Supreme Court) and wait to purchase insurance once they “need it.” This will have a negative impact on margins. However, we believe that HMOs will start to increase pricing in the individual market shortly to alleviate this potential problem. We believe large-cap pharmaceuticals will face the most negative impact due to the increased tax they will have to pay to finance the bill and a possible shift to lower cost drugs.
Viva Italia Looking at Europe, one may argue that Germany has been “outmaneuvered” by Italy twice. First, losing 2-1 in the Euro2012 soccer tournament on Thursday, and second, (and more importantly) the Germans gave some ground on allowing the Eurozone Bailout Fund to be used to support struggling banks, as well as to make bond purchases. While this is a step in the right direction, we are still early in the process and the Germans will still play a major roll in the direction of where the funds go. Also, the current size of the fund in approximately 400 billion Euro, which is roughly only 15 percent of the Italian and Spanish debt markets, thus size ultimately may become a concern. Nonetheless, global equity markets welcomed the news, leading to strong gains on the last day of the quarter.
It's evolve or die, really, you have to evolve, you have to move on otherwise it just becomes stagnant. ~ Craig Charles Nothing can last forever, and we are seeing a stark reminder of that with two (former) “Tech Titans” this week. Only a few years ago, Nokia and Research in Motion Limited (RIM) were leading wireless telecom companies, with dominant global market share (Nokia) and a de facto Enterprise industry standard (RIM’s Blackberry handset). This week we saw RIM’s report very disappointing earnings and learned that Nokia’s relationship with Microsoft may not be as “exclusive” as once thought. As we have learned in the tech space, companies must “evolve” or they will die. Apple, Google and Samsung did this in the wireless space; and we are seeing the ramifications throughout the industry.
Our Takeaways from the Week
- We continue to favor HMOs due to their strong balance sheets, healthy cash generation, and lack of European exposure
- We are still cautious on the European economy as austerity measures have yet to take hold. We remain underweight international equities and will continue to tilt our equity exposure towards emerging markets and U.S. economic growth