Sen. Ted Kennedy's dream of a healthcare plan may finally be coming to fruition. With Sen. Olympia Snowe's (R., Maine) recent decision to vote on the healthcare reform bill, the United States Senate Committee approved its version of legislation to overhaul the nation's $2.5 trillion healthcare system. While the bill continues to transform itself into a final product, the winners and losers are already starting to take form. Several subsectors of the health segment could be great long-term investments as the bill evolves and moves into law. For the short-term prospects, the healthcare segment offers a way to play our domestic population change as more people are living longer.
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The Fighting Pharmaceuticals
President Obama promised to fight the pharmaceuticals industry during his campaign. Putting that into practice is another matter as the drug makers and their lobbyists seem to be getting everything they ask for. The industry fought hard, kept an $80 billion rebate agreement with Finance Committee Chairman Max Baucus and the White House, and prevented a nearly $106 billion 10-year "tax" on additional drug rebates under Medicare. The drug makers also blocked legislation allowing cheaper drugs to be imported from Canada.
The Winners
The iShares Dow Jones US Pharmaceuticals (NYSE: IHE) offers a way to directly play the drug companies and their dominance in the bill. The exchange traded fund (ETF) holds 34 of the largest domestic companies in the industry. This includes generic manufacturers, such as Perrigo (NASDAQ: PRGO). Generic drugs should continue to grow in use, regardless of the final outcome of the bill. The ETF charges 0.48% in expenses and yields 0.67%
With a $750 million dollar annual fee dropped from the final revision of the bill, laboratory testing companies are breathing a sigh of relief. Doctors and hospitals now outsource many of the costly and routine tests need for healthcare to third party providers. Both Laboratory Corp. of America (NYSE: LH) and Quest Diagnostics (NYSE: DGX), as the largest providers of these services, are great way to play that growth.
The Losers
Health insurers gained a slight victory when they helped defeat a state-run government option, but they will still see more than $6 billion dollars worth of annual fees. In addition, companies like Aetna's (NYSE: AET) Private Medicare Advantage health plans will face more competition through a competitive bidding process. Pharmacy benefit managers will now be required give the Department of Health and Human Services information about rebates they get from drug makers. Shorting the iShares Dow Jones US Healthcare Provider (NYSE: IHF), which is made up both of these subsectors, could be an option if the final versions of the bill add any additional fees or restrictions.
Medical device makers are also feeling the brunt of the Senate's ills. The manufacturers of drug-coated stents and other health appliances are facing a 10 year, $4 billion a year fee for their products. The iShares Dow Jones US Medical Devices (NYSE: IHI) may be a potential short candidate depending on continued legislation. The fund however, has been on a strong run this year, up nearly 30%, and many analysts believe that the fees could be reduced.
Bottom Line
While the bills are still in their early forms, the United States healthcare overall is already beginning to show signs of the winners and losers. Both the pharmaceutical industry and lab testing are emerging as some the winners contrasted with device makers and health managers as the losers. The preceding ETFs provide a great way to play both sides of the bill and America's future health. (For more, see Investing In Medical Equipment Companies.)
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