House Passes Health Care Reform, But the Senate’s Prescription Likely to Vary
In this Q&A, Thornburg’s Connor Browne doubts the Senate will pass the House’s American Health Care Act (AHCA) in its current form, and is cautious that the status quo may even prevail. But if legislation does ultimately get signed into law, the impact on health care sub sectors will vary, with overall health system utilization likely to decline somewhat. That would impact stocks in a sector that has nearly tripled in total return since passage of the Affordable Care Act in 2010, substantially outperforming the S&P 500 Index’s roughly 150% gain in the period.
Q: Despite the well-known challenges of the Affordable Care Act—from failing state insurance exchanges and non-profit co-op health plans to annual double-digit health insurance premium increases to narrowing provider networks for patients shunted into Medicaid—health care stocks have actually had an excellent run since the ACA was passed in 2010, though the sector peaked two years ago and has been rangebound since. Assuming the Senate passes the House legislation without major changes, what’s the outlook for the sector now? Would you expect the American Health Care Act (AHCA) to result in less utilization of the health care system, and so less revenue for health care stocks in general?
Connor Browne: Yes, assuming the Senate passes the bill as is, I would expect slightly more uninsured and somewhat lower health care utilization. This would have the largest impact on the hospital sector where the publicly traded companies have both high fixed operational costs and lots of debt, but would also impact the rest of the sector, though to a lesser degree. All of that said, I think it is very unlikely the Republicans in the Senate pass the bill as it stands. There was even word that the Senate might start over and write its own from scratch. I continue to believe that the status quo is a reasonably likely scenario in health care and that it will be difficult to get Republican Senators and the conservative and moderate Republicans in the House to all agree on health care legislation.
Q: The medical device tax looks likely to be on the chopping block, which would presumably enhance investor interest in medical device makers. Insurers may be poised to enjoy more pricing flexibility and fewer mandates on their policy options, although they may also face greater industry competition if the AHCA works as planned. Although you’re a bottom-up investor, from a subsector perspective, where would you look for opportunities resulting from the legislation?
CB: We like to find companies that we believe are undervalued in many different possible future scenarios, including whether we get repeal of Obamacare or not. Medtronic is a great example. Given potential repeal of the medical device tax, the company could benefit. But that tax’s repeal is not our base case. We think the stock looks undervalued without that tailwind. There will be a lot to watch as the Senate spends the next few months debating the bill. How the bill evolves could have material impacts on different sub sectors, and keep in mind, nothing getting done remains a possibility.
Q: What about drug makers, which came under heavy criticism from both Donald Trump and Hillary Clinton during the election campaign. Are pharmaceutical companies still in the political cross-hairs?
CB: To me, this is just another example of how hard it is to get meaningful legislation done in the current political climate. There was some opportunity for Trump to come into his presidency looking to grab the middle of both parties and move forward on legislation that moderate Republicans and Democrats both agree on. That was not the path he chose. Given he needs to find the votes amongst only the Republicans with his current approach, it will be hard to get them all on board with legislation that would significantly change the way drugs are purchased by the government. It hasn’t even come up in legislation proposals so far!
Q: And provider network stocks such as hospital groups?
CB: Lower coverage could hurt the hospitals, whether because exchange options become more limited or because Obamacare repeal reduces funding for exchanges or Medicaid expansion. It will be interesting to watch how this group trades over the coming months. Regarding hospital investments, we’re on the sidelines for now.