Stock prices anticipate changes six months or more in advance. Healthcare and pharmaceutical stocks have been rising for even longer than that because of proposals in the healthcare legislation that is about to become law. Some ETFs that cover the sector are doing so well that they have even hit all-time highs. The stock market is stating quite clearly that healthcare 'reform' is good for reforming the bottom lines of businesses that operate in the sector.
Certainly there is no question that real reform of the U.S. healthcare system is desperately needed. The U.S. spends much more per capita on its citizens' health and gets less for it than any other developed country. According to UN World Population Prospects, life expectancy in the U.S. ranks 38th worldwide, just behind Chile and Cuba. The system is rife with abuses, only a few of which seem to be addressed by the bill, which by itself will create some more. The myriad minute details of what is actually in the 2000-page bill are known by only very few however, including most of the members of congress who enthusiastically voted for it. Nevertheless, the overarching goals are quite clear.
The key provision of the bill can be summarized as 'everyone will be required to have health insurance, but it won't be provided for, instead you'll have to buy it unless you are poor, and the insurance companies won't be able to exclude those with pre-existing conditions'. The wording of the legislation hides the fact that it is really a gigantic tax increase that will be applied arbitrarily and even worse is subject to unlimited increases without further legislation. The U.S. government doesn't get the tax money however, it merely uses its policing powers to make sure you fork over your money to privately run corporations. Since there is no free lunch, forcing these companies to take customers and engage in behavior that raises their costs, means that they will be raising their prices to maintain their profits. Unlike in a free market, corporate profits are protected in the legislation and the healthcare and pharmaceutical industries will consequently become loosely regulated government protected monopolies (actually oligopolies because there is more than one company involved). For a recent example of what occurs when such entities are created, think of the highly corrupt real estate money-pits Fannie Mae and Freddie Mac that now require unlimited taxpayer funding to keep them operational.
Health care costs in the U.S. have tended to rise faster than inflation for many years now. There seem to be no controls in the healthcare legislation on future price increases. The public is therefore left completely exposed to paying an every increasing percentage of their income for health insurance. This working and middle class will be hit disproportionately hard. Without significant controls on costs, and this is the most serious issue facing healthcare in the U.S. and the one least addressed by the legislation, the average person will see their healthcare expenditures skyrocket. People who engage in responsible preventative behavior and make great efforts to take care of their health will be rewarded for their efforts by paying more in insurance costs to support those who act irresponsibly.
A simple checkup of healthcare and pharmaceutical ETFs shows what the market thinks of how the healthcare legislation will impact the industry. The pharmaceutical companies jumped on board and supported the healthcare bill early on and in exchange President Obama made a deal with them to exclude negotiation for drug prices. Pharmaceutical ETFs XPY, IHE, and PJP respectively made new all-time highs last fall, in January and just recently. Healthcare provider ETFs FXH and IHF are doing well too. FXH hit an all-time high in December and IHF is at a two-year high and has more than doubled off its low from last spring. The market unquestionably sees healthcare 'reform' as good for business in the sector and anticipates huge increases in profits. Those profits will be coming out of your pocket.
Disclosure: None
NEXT: Housing Hype Fades With Sales Numbers
Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21
This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.
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