Impact of US Healthcare Bill on Stock Markets

On 7^th November, 2009, US House of Representatives passed the bill pertaining to Healthcare reforms by a wafer-thin margin, thereby preparing the nation for a national healthcare system. As a result, it becomes prudent to know the financial implications on stock-market for market-savvy investors in coming days. 

For short-time investments, there would be a negative impact on US stock markets. It is assumed that short-term price movements would be chaotic in nature. From intermediate perspective, if the US Healthcare Reforms Bills is passed by the legislation and becomes a reality, the performance of stocks pertaining to healthcare sector would perform miserably as compared to the scenario prior to the passage of US Healthcare reforms.

The graphical representation depicted below shows the historical relative price performance of varied healthcare segments vis-à-vis S&P 500. Such diversified healthcare segments incorporate biotech ($DJUSBT), healthcare providers ($DJUSHP), medical equipment manufacturers ($DJUSAM), medical supplies ($DJUSMS) and pharmaceuticals ($DJUSPR). In general, the entire healthcare sector is represented as $DJUSHC.



Based on the graph, it is clearly shown that biotech and pharmaceutical sectors remain an underperformed. It is expected that this relationship would more pronounced in the future. As compare to before, the remaining sectors are expected to have lower relative performance, especially the healthcare providers including health insurance companies.

A sample of the numerous specific negative profits factors in US Healthcare is enlisted below:

Drug patent protection would be reduced from 20 years to 12 years prior to generic competition in the market. As a result, the profitability of the new drug gets diminished. (In 1995, a legislation passed by US Congress increased the drug patents from 17 to 20 years with a view to encourage and give a Philip to R&D. But currently, which is seen as a reversal of the earlier stand the duration has been cut down from 20 to 12 years which in turn would encourage generic competition – a retrograde step at the expense of advancements in the field of medicine.

With a view to lending support to healthcare budgetary allocation annual fees would be assessed on insurance companies, drug manufacturers, medical device companies and clinical laboratories. This in turn would lead to diminish valuations of the companies in aforesaid categories.

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In an uncertain scenario the insurance companies may or may not be driven out of business (but certainly would minimize current valuations) and incase, even if such organizations are able to survive conversion to service utilities with regulated rates and profits is not ruled out in future and definitely would impact stock-markets below historic-levels.

A sample of large companies in USA specializing in healthcare sector includes:

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• Biotech: AMGN, BIIB
• Pharmaceuticals: JNJ, PFE
• Medical Equipment and Supplies: MDT, BDX
• Clinical Labs: DGX
• Insurers: AET, UNH
• Hospitals: CYH, UHS

The aforesaid list is not an official recommendation made by any authority simply a representative sample comprising of sectors and its sub-sectors.

Source-Medindia
SAM