As I write, America’s healthcare bill hangs in the balance.
The vote was delayed on Thursday, and the House expected a final vote around 5PM on Friday.
Whether the bill passes or not, reform is coming.
And because healthcare constitutes such a huge chunk of total U.S. spending, the aftershocks of such reform will most certainly be felt.
If you don’t have portfolio exposure to health care, you’re doing yourself a tremendous disservice.
Health care spending is projected to outpace U.S. GDP growth every year — for the next nine years! It’s also projected to outpace growth among private business in the United States over the same period.
On the relentless strength of health care, I asked my senior analyst, Martin Hutchinson, to unpack the sector for us.
Hutch’s full analysis is below, including a way to instantly true-up any holes in your portfolio.
Chief Investment Strategist, Wall Street Daily
Question: Martin, the House health care bill is worth addressing, since it’ll have ripple effects across the entire economy. Get us up to speed. What does this bill mean for America?
Martin Hutchinson: The real problem that the House health care bill ought to be addressing is cost. Because U.S. health care is shockingly expensive. It costs 18% of GDP. The next most expensive countries are France, Sweden and Switzerland at 12%. Britain’s down there at 9% GDP — as is Australia. And Germany is at 11%.
So the U.S. government’s basically paying as much as the British government for health care. And then private citizens are adding as much again. You’re paying twice. And yet U.S. health care outcomes, life expectancy and so on are only in the middle compared with other rich countries.
The reasons for this are not entirely clear. Partly it’s the complexity of the insurance system. The American insurance system’s a madhouse. And you’ve got a huge number of bureaucrats involved, both in the insurance companies and in the health care providers. And that all adds costs. The trial lawyers inevitably add costs because it’s far too easy here to sue doctors and such. And the payouts tend to be too great.
Then the U.S. consumer and health care system tends to be paying for the R&D of all the drug companies through higher drug prices. Pretty much everywhere else in the world places price controls on drugs. The U.S. tends to pay for everybody’s research and development because its drugs aren’t so tightly price controlled.
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Finally, you’ve got unfunded mandates. Hospitals have to bear emergency room visit costs without reimbursement — under a 1986 law that’s for the indigent. And that adds hugely to the costs. They’re having to charge everybody else three times as much to pay for the treatments they give away for free. Therefore, any Obamacare reform should have — as the top priority — to cut the costs of health care and bring the U.S. down to its competitors, approximately.
Question: Does this House bill accomplish that, Hutch?
Martin Hutchinson: Well, not a lot. It removes the individual mandate. That reduces the number of enrollees. But that’s not actually a good thing, because there’s a danger of increased costs. The healthy people will tend to drop out, and the sick ones will stay in the system.
It passes Medicare costs on to the states and the federal governments through block grants. And that’s really just shuffling the deck chairs on the Titanic. It’s not really making much difference.
It removes some Obamacare taxes — such as the tax on Cadillac-level health plans. But that doesn’t reduce costs — and it does increase the budget deficit, which is worrying. The new House bill is just about worth passing, but it’s very feeble. What it needs to do, and what it doesn’t do, is remove the unfunded hospital mandates. Allow interstate competition between insurance companies. Curb medical damages from trial lawyers.
That would reduce costs and actually make a real difference — and perhaps bring the U.S. down to its competitors.
Question: Hutch, as you know, any worthwhile portfolio has an element of diversification — it’s properly allocated across all sectors. What should our readers be doing as far as health care exposure in their portfolios?
Martin Hutchinson: I think you’d probably want to avoid the U.S. health care system. How do you do that? You buy a company that’s primarily in one of the better-run systems. And indeed, the system that works best by all accounts is Germany.
I quite like Fresenius Medical Care (NYSE: FMS). It’s a German kidney dialysis company. It does everything relating to kidney dialysis, and it provides a service around the world. It has 3,600 clinics in 45 countries. It’s a $25 billion company, and it’s currently trading at 14 times forward price-earnings, which is pretty reasonable for the health care sector. And it gives you a 1% dividend deal, as well.
So in terms of getting health care exposure without getting U.S. health care exposure, I think that’s a good way to go.
Question: Excellent, Hutch, thanks for your time today.
Martin Hutchinson: Great pleasure. Thanks very much.
Question: This Wall Street Daily signing off.
Senior Analyst, Wall Street Daily