Tax Implications

When it comes to those investing sectors that stand to win or lose from healthcare reform, the biggest–and earliest–winner was the pharmaceutical industry, which negotiated a deal with the White House a year ago, before the reform debate boiled over. The big pharmaceutical companies, like Pfizer and Merck, struck a deal to cut their potential losses by promising not to fight reform while paying out $85 billion in savings and fees over 10 years. They also seem to have avoided their worst fear: government price controls.

David Kelly, managing director and chief market strategist at J.P. Morgan Funds, says that one of the main flaws of the legislation is that government spending will skyrocket. But stepping back from that very large negative, Kelly sees an opportunity for investors in pharmaceuticals.

“The main positive is this: We don’t really think this is going to control spending,” argues Kelly. “Take, for example, the prescription drug benefit part of the bill. The total pharmaceutical spending in the United States has been growing at a very rapid pace for many years, and if you throw more money at the problem you are not going to reduce the pace of spending. So filling up the ‘doughnut hole,’ however equitable it sounds on one level, isn’t going to reduce total spending on pharmaceuticals.”

So pharmaceutical firms, particularly those that make brand-name drugs, will benefit from the tens of billions of dollars the newly insured send to their companies. With the government closing that so-called “doughnut hole” in Medicare’s drug program for the elderly by 2020, a surge of government-funded dollars will allow more of the elderly to afford the drug companies’ more expensive drugs, which are the biggest drivers of profit for those firms.

As this wave of money and customers are unleashed into the healthcare system, Kelly sees other opportunities.

“If you increase the number of people that are eligible for medical insurance, you probably push up the total consumption of medical services, which will be something of a benefit for hospitals, though I expect a lot of battles about how much they get paid,” Kelly said. “But overall I expect total healthcare spending to rise on hospitals, total healthcare spending to rise on pharmaceutical companies, and for medical device makers.”

Insurance companies that helped support reform with millions of dollars in advertising and got beat up by the reformers anyway, should be happy with the bill because of all those extra customers coming their way. But a big caveat, according to Kelly, is the uncertainty.

“For insurance companies it’s a really very complicated story, because one of the problems of this bill–and this is true for the whole thing but particularly for insurance companies–is that we don’t know what the end game is here,” Kelly said. “This is a bill, not constitutional law. And as various problems come up, we can expect to see all sorts of attempts to change it in various ways to hold down costs or to get various players to pay for more of the healthcare services being consumed. And it’s very difficult to figure out from that who the winners and losers in the industry are going to be.”