This is a syndicated repost published with the permission of Money Morning. To view original, click here. Opinions herein are not those of the Wall Street Examiner or Lee Adler. Reposting does not imply endorsement. The information presented is for educational or entertainment purposes and is not individual investment advice.
With Trump in the White House and Republican majorities in both houses of Congress, an overhaul of Obamacare is a given – and what results will change the trajectory of most healthcare stocks.
Trump often spoke critically of Obamacare, promising to “repeal and replace” it if he won – as have most Republican legislators.
But what we’ll end up with next year is very much unclear.
Of the three classes of healthcare stocks, the insurers reflected this uncertainty the most the day after the election. Aetna Inc. (NYSE: AET) was up almost 5%, while UnitedHealth Group Inc. (NYSE: UNH) fell a bit under 1%, and Molina Healthcare Inc. (NYSE: MOH) plunged almost 16%.
Hospitals got hit hard across the board, on the other hand. That’s because they’ve been clear winners from Obamacare, benefiting from the reduction in uninsured patients showing up at their emergency rooms for treatment they are legally required to provide for free.
Fear that expense could return if Obamacare is repealed hammered hospital stocks on Nov. 9. HCA Holdings Inc. (NYSE: HCA) fell almost 11%. Universal Health Services Inc. (NYSE: UHS) slipped nearly 7%. And Tenet Healthcare Corp. (NYSE: THC) plummeted almost 25%.
But one group of healthcare stocks had the opposite reaction…
These Healthcare Stocks Cheered Trump’s Election Win
But unlike the other healthcare stocks, these biotech stocks were not reacting so much to the fate of Obamacare. Their rise was a relief rally fed as much by the defeat of Hillary Clinton as it was Trump’s win.
“Most biotech and pharma companies might be sighing a sigh of relief because Mrs. Clinton looked like she might do something drastic on drug pricing,” Clive Meanwell, chief executive officer of Medicines Co., told Bloomberg on Nov. 9.
During her campaign, Clinton had sharply criticized the 5,455% price hike of the cancer drug Daraprim by Turing Pharmaceuticals last year, as well as Mylan NV’s (Nasdaq: MYL) 548% increase in the price of its EpiPen allergy treatment.
While Trump mentioned drug prices in his speeches, it wasn’t a focus.
But now the shock of Trump’s election is wearing off. And the promises made in the heat of the campaign will prove much harder to put into practice.
In fact, the healthcare ground in Washington is already starting to shift…
Why Trump Can’t Gut Obamacare in 2017
While some liberal pundits have lamented the imminent demise of Obamacare in the week since Trump’s victory, they’re getting ahead of themselves.
While health insurance and hospital stocks would indeed get crushed if all the provisions of Obamacare were repealed, that’s an extremely unlikely scenario. Here’s why.
Trump has already begun to walk back his promises of a wholesale dumping of the ACA in an interview with the CBS News program “60 Minutes.”
He told reporter Lesley Stahl that he wanted to keep one provision that requires insurers to accept customers with pre-existing conditions and another that allows young adults to remain on their parents’ insurance plan until age 26.
Trump also said he would not leave people without insurance coverage, suggesting a new healthcare plan would replace a repeal of the ACA “simultaneously.”
Trump’s change of heart stems partly from a recognition of reality.
The Obamacare law has been in force for six years now, so changing its provisions won’t be easy. Plus, Trump and the GOP would be hard-pressed to take away health coverage from some 20 million Americans. And, unfortunately, many of the things Republicans have said they would like to remove happen to be mechanisms that pay for that coverage.
Here’s what Trump’s presidency will mean for healthcare stocks in 2017…
The Outlook for Healthcare Stocks in 2017
The details of a Republican-designed healthcare law will get worked out in negotiations, but we do have some clues from Trump’s healthcare proposals, as well as a GOP plan put forward this past summer by Rep. Paul Ryan (R-WS).
Assuming these proposals form the basis for what will replace Obamacare, here’s how the different healthcare stocks will be affected:
The enthusiasm for pharma stocks last week was premature. Just because Trump was less critical during the campaign than Hillary Clinton about high drug prices doesn’t mean it won’t become part of the healthcare reform conversation. Popular outrage and the opportunity to reduce costs will prove very tempting.
And that’s not the only concern for pharma stocks. One of Trump’s proposals is to allow imported pharmaceuticals from places like Canada, where the same drugs often cost far less. This would be popular with consumers, but would take a big bite out of profits.
On the other hand, Ryan’s plan has a provision for streamlining and speeding up the drug approval process, which would help pharma companies get new medicines to market sooner.
Overall though, drug stocks have more to lose than to gain from Trump’s healthcare reform.
Health Insurance Stocks
Although Republicans aren’t going to let millions of people lose insurance, how people are covered will change.
Several provisions in Ryan’s plan would help the insurers. An idea to make it easier for small businesses to form pools that will allow more of them to offer employer-based insurance. Trump and Ryan’s proposals also would seek to reduce regulations.
A proposal to allow insurers to sell policies across state lines, however, would have little impact because insurers are reluctant to spend the money and time setting up networks in new states. Insurers like Humana Inc. (NYSE: HUM) and UnitedHealth could also get a benefit from a shift toward privatization, particularly the Medicare Advantage program.
The biggest concern here is if Trump decides to eliminate the individual mandate to have insurance. That raises the risk of younger, healthier people opting not to buy insurance, a problem for insurers who need those premiums to help cover the costs of older, sicker patients. Trying to game the system by enrolling only when you need insurance will be punished with higher premiums instead of Obamacare’s tax penalty.
While healthcare reform smay not be the apocalypse for hospital stocks that Wall Street foresaw on Nov. 9, there’s not much of a silver lining here.
Hospitals are unlikely to get a big surge in uninsured patients, but GOP reforms are likely to reduce business. In particular, a move away from Medicaid expansion would hurt hospitals.
Unfortunately for the hospitals, neither Trump nor Ryan have put forth any proposals that would offset the potential losses that would come from fewer patients (unless you count the separate reforms that would reduce the corporate tax rate).
And to make matters worse, several hospital operators, including Tenet and Community Health Systems (NYSE: CYH), are carrying massive debt loads from recent merger deals. They can’t afford any hit to their cash flow.
About Money Morning: Money Morning gives you access to a team of ten market experts with more than 250 years of combined investing experience – for free. Our experts – who have appeared on FOXBusiness, CNBC, NPR, and BloombergTV – deliver daily investing tips and stock picks, provide analysis with actions to take, and answer your biggest market questions. Our goal is to help our millions of e-newsletter subscribers and Moneymorning.com visitors become smarter, more confident investors.
Disclaimer: © 2016 Money Morning and Money Map Press. All Rights Reserved. Protected by copyright of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including the world wide web), of content from this webpage, in whole or in part, is strictly prohibited without the express written permission of Money Morning. 16 W. Madison St. Baltimore, MD, 21201.
Join the conversation and have a little fun at Capitalstool.com. If you are a new visitor to the Stool, please register and join in! To post your observations and charts, and snide, but good-natured, comments, click here to register. Be sure to respond to the confirmation email which is sent instantly. If not in your inbox, check your spam filter.