Two veteran investors discuss the winners and losers of reform and where they're looking for future growth.
With recent breakthroughs in science and the passage of the most massive change in U.S. health-care policy in decades, many opportunities and challenges exist in investing in health-care securities. To help investors navigate the sector's complexity, I moderated a panel of expert health-care investors June 24 at the 2010 Morningstar Investment Conference. On the panel were Andy Acker, manager of Janus Global Life Sciences
More Expansion Than Reform
Damien Conover: How do you see health care's investment landscape changing in light of the passage of reform? Have you repositioned your portfolios?
Kris Jenner: It's a type of question that has been posed quite frequently since I started running our health-care fund in 1999. How do you position your fund relative to public policy or legislative changes that are occurring in Washington? For seven or eight years, I would just say that the changes were so incremental and so hard to predict that they didn't really have a lot of bearing on the investment philosophy. But now we have the most comprehensive piece of social legislation since the enactment of Medicare under the Johnson administration in the late 1960s. It's time to pay attention. For the first time in my investment career, I have really thought about the positioning of the portfolio relative to how we see things unfolding, not just this year or next year, but what we see far down the road.
There were three goals of health-care reform. One was to provide insurance for the uninsured. The second was to improve the quality of health care. And the third was to achieve goals one and two while at the same time having lower health-care expenditures. I would say that this legislation really addresses goal number one, which is to have some 30 million Americans who were not insured to be insured. Our expectation is that down the road costs are going to accelerate. Somewhere in the latter part of this decade, I predict that we will have something like Health-Care Reform II that will be highly focused on cost.
As for what groups are in the crosshairs of this legislation versus those that are likely to benefit, investors should think about volume-- more medical stuff, more physician visits, more health-care consumption. At the one end of the spectrum might be the hospitals. The hospital group, with its services to the uninsured and its so-called bad debt, is the only group that I know of that will be paid for doing something that they are doing for free today. Another beneficiary will be IT areas within the health-care system. The electronic technology within health care is a decade behind the financial-services industry. There's definitely going to be some winners in the hard wiring of the health-care system. One that we're playing is Cerner
But at the same time, there's going to be tremendous cost pressures. So, at the other end of the spectrum is the medical-insurance industry: They have no friends anywhere. None, whatsoever. During this time of colossal change, they have no constituency. And that's a bad place to be, because this bill was written hurriedly. There are many elements in there that have to be interpreted by Health and Human Services. The core bill is 2,500 pages long, and there's 1,400 places where it says "the secretary shall." This language leaves a tremendous scope for bureaucratic interpretation. So, the details are yet to come, and when you don't have any friends anywhere to be found, it puts you in a very perilous position.
Andy Acker: This was really more of a health-care expansion than a health-care reform. We're going to have 30 million more customers coming into the system through insurance by 2014, and that's good. The flip side, at least in the near term, is that in order to make the budget work we got the stick before the carrot. So many of the new industry fees, taxes, and regulations come up first. That's affecting the pharmaceutical companies now. We're going to see a bit more of that impact next year. People thought that once we had certainty on health-care reform that we would see a rally. We haven't really seen that yet, mostly because we're getting this negative impact in the near term.
I agree with Kris about health-care IT. One company that we think has a large oppor- tunity is Athena Health