Election will greatly affect health care stocks

Editor’s note: The health care sector of the economy faces a significant amount of uncertainty and change. Most notably, the upcoming presidential election will have a major impact on the sector. In the following Q&A interview, Robert W. Baird & Co. Inc. senior research analyst Whit Mayo shares his thoughts on the opportunities and challenges facing public and private companies in the health care sector.

Q: On the heels of Q2 earnings, how has the health care sector performed so far this year and what is the outlook for the remainder of 2012?

Mayo: “Overall, sector performance is very mixed, but the group as a whole has held in okay this year. For our part, we focus on a very narrow sliver of the health care world, mostly facility-based providers, and we’d characterize the outlook for the remainder of 2012 as complicated. We’ve actually seen most companies exceed consensus estimates and the forward outlooks have been ratcheted modestly higher. However, exiting 2Q earnings, investors have generally used the positive news to sell these stocks and position themselves for the election and deficit conversation.”

Q: What impact will the upcoming presidential election have on the health care sector?

Mayo: “This is absolutely, in the market’s view, the most important election ever for the modern day health care investor. There are so many permutations of possible outcomes that one can analyze. If President Barack Obama wins his bid for reelection, the market will be forced to assign a material probability of increased coverage via the Patient Protection and Affordable Care Act (PPACA). If Republican presidential candidate Mitt Romney wins, the market will be forced to assign a material probability that the GOP will attempt to dismantle reform, potentially leave $700 billion of provider cuts in place and then go so far as to assign a risk that Republican vice presidential candidate Paul Ryan’s philosophical view on premium support/defined contribution-like health care could actually be presented as policy. I personally think a Romney/Ryan victory would be bad for the entire health care sector. Investors will have uncertainty on uncertainty.”

Q: How is the recent Supreme Court ruling on health care impacting health care stocks, both positively and negatively?

Mayo: “Reform, as written by policymakers and interpreted by the Congressional Budget Office, should be positive for almost every group in health care. More coverage means positive implications for pharma, hospitals, medical device manufactures, managed care, distributors, etc. Everyone had a price to pay, but as the law is written, just about everyone comes out OK – some less than others. Managed care would have liked a better deal. Some of the post-acute care providers, notably home health, will see nothing but negatives from the deal. Home health gave up $55 billion in future reimbursement and will not benefit by a penny from increased coverage. With that said, all the recent attention paid to the Supreme Court ruling has been negative for the sector, as multiples have come down. Investors just want clarity.”

Q: How are companies preparing for or dealing with the uncertainty over possible federal budget cuts that may be triggered early next year?

Mayo: “Elections and deficits almost always drive Medicare policy. Providers are used to these challenges and understand that they are inherently a ‘price taker’ and constantly at risk. The actual rate cuts that providers will see, in all likelihood will prove to be very manageable. Unfortunately, the lack of visibility and clarity on the broader policy issues inhibits their ability to execute on a strategic plan. Few will take on elevated risk in an unknown environment, unless the reward greatly outweighs the risk.”

Whit Mayo is a senior research analyst covering health care facilities and services at Robert W. Baird & Co. Inc. in Milwaukee. This question-and-answer was reprinted by BizTimes with permission from Baird.

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