Around the Street

Experts Talk Health-Care Reform Bill Impact

Bloomberg BusinessWeek compiles comments from Wall Street strategists on Mar. 22 on the industry and market impact of the passage by the U.S. House of Representatives of the most sweeping health-care legislation in four decades on Mar. 21:

Ralph Giacobbe, Credit Suisse

On Sunday, the House passed the Patient Protection & Affordable Care Act (H.R. 3590) and the Health Care & Education Affordability Reconciliation Act of 2010 (H.R. 4872). The combined legislation would cover 19 million uninsured beginning in 2014, with a majority of uninsured covered by 2016 (30 million). The Congressional Budget Office has scored the bill to cost $940 billion.

In our view, coverage of 32 million uninsured provides the greatest benefit to hospitals. The final bill has some incremental adjustments/reductions to the group. … [N]onetheless, we believe health-care reform could provide hospitals with slight upside to numbers. More importantly, greater coverage of the uninsured should alleviate a large portion of bad debt expense.

Jeff Kleintop, LPL Financial

A catalyst for another 5%-10% stock market pullback that weighed on the stock market late last week is the health-care legislation that was passed in the House on Sunday. Within the Health Care sector, the impact is mixed, the HMO industry is negatively impacted while the hospital companies, along with other beneficiaries of increasing health-care volumes, benefit. However, much of this impact has already been priced into the sector. The potential negative outcome for the broader market stems from the tax and deficit impacts of the legislation.

The new taxes are a negative for investors. The legislation imposes a new 3.8% tax on investment income. In addition it adds a 0.9% tax on wages for those earning more than $250,000, set to take effect in 2013.

Another macroeconomic impact is the potential to increase the deficit. The bill establishes new insurance exchanges for the purchase of health insurance by those who do not have insurance offered through their employer. The bill caps the share of family income spent on health-care premiums. Two important facts are necessary to understand the concern evident in the markets over the deficit impact of the legislation:

• The average cost of a family health insurance policy offered by employers was $13,375 in 2009, according to the Kaiser Family Foundation and the Health Research & Educational Trust. On average, employees pay about 20% of premiums with the employer making up the rest (an average of $10,700 per employee).

• Under the exchange, the cost of a policy would be subsidized by the taxpayers for individuals and families with incomes up to 400% of the poverty level. This means a family of four with the national average income of about $70,000 (at 317% of the poverty level of about $22,000) would have their spending capped at 9.5% of income, which would be about $6,650. The other half of the cost of the insurance would be picked up by taxpayers.

Tom Gallucci, Lazard Capital

The long period of time between the passage and implementation of the bill inherently lends itself to some level of uncertainty. The debate around health care will persist even after this legislation is behind us. Polls suggest much of the public has been opposed to reform as passed, and Republicans have vowed to make the legislation a centerpiece of the November elections. We suspect it will be a material aspect of the debate for the 2012 presidential race as well.

Depending on how the political winds blow in the next two years and whether government budget deficits grow or narrow, changes to the legislation are possible. Even without formal adjustments to the bill, the real-life effects of large federal bills tend to be difficult to predict, as there are typically unintended consequences. Given the sheer size of this legislation, the number of constituents it affects and the authority it leaves to regulators, analyzing the long-term impact of the bill is more difficult than it may at first appear.

Scott Fidel, Deutsche Bank

The House vote sets the stage for health reform to soon become law. Our long-standing view is that the reform bill will be a net long-term negative for industry profitability; the benefits of covering more than 30 million uninsured will likely be more than offset by the negative impact of Medicare Advantage payment cuts, industry taxes, and stringent new regulations on underwriting practices. At the same time, these risks are already well understood by investors after more than a year of rancorous debate; our buyside survey showed nearly 80% of investors expecting reform to be approved into law.

However, while many investors believe the approval of the bill will allow for clarity after more than a year of anxiety-producing debate, we view the House vote as marking only the end of the beginning of this process. The next phase will include the release of thousands of pages of regulations at the agency level translating the law into a new regulatory framework.

Phillip Seligman, Standard & Poor's Equity Research

We view the passage by the House of Representatives of the health reform package as positive for managed care organizations (MCOs), on balance. The MCOs will face fees, which are delayed until 2014, and will have restrictions such as the ban on rescissions, no lifetime caps, and inability to bar coverage based on health status, which can pressure margins.

But we think these negatives may be offset by enrollment gains, providing economies of scale, leverage over general and administrative costs, and greater negotiating clout with providers. We also see potential opportunities for consolidation.

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