Speaking of weather reports…health reform has set off political
weather patterns that make the antagonistic global warming climate debate seem
playful.

The primary goal of health reform was to get health care coverage for
the uninsured. It succeeds in this regard as more than 30 million uninsured
people will now get benefits.

The principal ways the bill expands coverage (and adds to government
expenditures):

1. Premium
   subsidies and subsidies for limiting out-of pocket expenses for
   deductibles and co-payments for low-income earners through both Medicaid
   expansion and new state insurance exchanges.
2. Coverage
   of the Medicare drug benefit gap for seniors.
3. Tax
   Credits for qualifying small businesses.

The government will finance these costs generally from:

1. Higher/new
   taxes for wealthier people (individuals earning $200,000 or couples
   earning $250,000).
1.  .9% increase in Medicare Part A
   tax
2. 3.8% tax
   on investment income
2. Healthcare
   industry fees (pharmaceutical and medical device companies).
3. Cuts in
   payments for Medicare Advantage Plans (alternative plans to Medicare for
   seniors).

The Congressional Budget Office says that the bill will actually cut
the deficit in ten years. The look-back in ten years should be very
interesting.

Health Care Companies

The health care industries came through this process in good shape.
The increase in numbers of insured people dovetails nicely with the favorable
demographic trends (aging populations, living longer and more actively) for the
industry. Also, the final bill excluded a government-run insurance option which
previously spooked investors with a fear of price negotiations that could have
significantly eroded profit margins.

Drug companies will have to pay several billion dollars in fees each
year but they will gain higher patient volumes from the newly insured and the
subsidies provided for the Medicare part D “doughnut-hole” gap. Both big pharma
and biotechnology companies did well at the expense of generics companies since
the 12 year patent exclusivity was left untouched. Device makers got hit the
hardest in fees but they also benefit from gaining more patients with insurance
coverage. Insurance companies fared decently, though they will have to change certain
underwriting practices and benefit structures, there are no rules affecting
their ability to increase premiums. 
Hospitals will get less in Medicare reimbursements in exchange for more
covered patients.

Health care is an important sector of our economy with spending of
close to 16% of our GDP. 
Similarly, it is an important sector of the stock market as it is the
third largest in the S&P 500 with nearly 13% of total stock market
capitalization. Only the technology and financial sectors are larger.

The bill is too new and too complex to know now the full effect it
will have on health care companies. The debate is already on over whether or
not the penalties are too low to induce some individuals and employers to
obtain coverage for themselves or for employees. Generally though, health care
companies have come through the reform process well and the fear of the unknown
is behind them.

 

The Stock Market

The stock market has been on a streak since February and it has been
more than a month since the S&P 500 closed out a day with a decline greater
than 1%. The length of this streak says a lot about the underlying strength of
this bull market, but we expect some degree of a short-term pullback before
prices can climb to new higher levels.

We expect the market’s momentum to pull more people in from the
sidelines. There is a renewed sense of comfort with stock investing coupled
with the ongoing frustration with low returns from money market funds and
bonds. It also doesn’t hurt that stock valuations are not quite yet into bubble
territory.

When we sense a whiff of the beginnings of a stock market “euphoria”,
which we are beginning to sense, our antennae is raised and we are careful to
stay true to our investment discipline. The quality of the economic recovery
remains to be seen.  We remain
fully invested in the markets as we navigate the subtle valuation differences
between asset categories and sub-categories.

We hope everyone has a Happy Easter and Passover.