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US Healthcare Policy Will Have "Minimum Impact" on Stocks

The proposed legislation to replace Obamacare in the US is "political suicide", say analysts - and so they think it is unlikely to be passed

Karen Kwok 18 May, 2017 | 4:28PM

All this week, we bring you a Guide to What the Experts to Say; the top insights from the Morningstar Investment Conference in London; emerging markets, stock picks and the impact of politics. 

The future of US healthcare policy – and indeed US healthcare stocks – currently rests in the hands of the Senate. The American Health Care Act, a proposed legislation for the repeal and replacement of Obamacare, was passed by members in the House of Representatives on May 4.

The Republican Party proposed the American Health Care Act bill to replace Obamacare, actioning one of President Donald Trump’s key messages during his 2016 presidential campaign. According to the NASDAQ Healthcare Index, healthcare stocks in the US have risen 10.5% since Trump was elected President in November 8.

Ann Gallo, senior managing director of Wellington Management said at the Morningstar Investment Conference in London last week that the idea of replacing Obamacare was “dead on arrival”, for two reasons; politically and technically.

“Literally speaking, in the US, the number one priority of a politician is to be elected. Eliminating benefits that you just gave to 20 million voters is not a successful strategy. That is one of reasons it was difficult to get through one of the Houses,” said Gallo.

Another reason why Gallo believes that a complete repeal of Obamacare will not be a success is the technicality of passing the bill – the Republican majority in both the House of Representatives and the Senate is extremely narrow. The Senate has 100 seats, and only 52 of them are Republican. A 60% majority is required to pass a meaningful legislation, such as completely repealing Obamacare.

“This is political suicide,” said William Ball, analyst with Sanlam, the fund management. “I suspect the House would not want to upset the 20 million voters that benefit from Obamacare.”

Gallo added that were was a commercial element to be considered too; politicians will show caution considering the healthcare sector represents about one sixth of the US economy.

What Impact Will There Be on Healthcare Stocks?

Gallo added that even with a chance in regulation there will only be a short-term meaningful impact on healthcare spending and by extension on healthcare stocks.

“There are even bigger forces and factors that longer term are going to have a much more powerful impact on healthcare spending. Insurance policies, the third-party payer system… healthcare is no longer being funded by the individual but by employers,” said Gallo.

Gallo said that currently the US healthcare system is blindly rewarding volumes. This means that the more time a patient consumes, the more lab test you order and the drugs you subscribe, the more money the healthcare company is going to make. But consumer behaviour is changing – they do not want to waste their money on something they do not need.

“Employers pay for 75% of healthcare costs, with the individual paying 20-25%. Historically my contribution to the 25% would predominantly come from an insurance policy, with the premium taken out of my pay-check every month, without me even noticing,” explained Gallo.

However, consumers increasingly want to minimise these monthly payments, and are putting pressure on the system to move away from superfluous spending.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
Fresenius Medical Care AG & Co. KGaA86.41 EUR-1.10
Johnson & Johnson136.34 USD-0.07
Roche Holding AG255.00 CHF-0.10-
About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk