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Health Care’s Outlook Clarifies

Obamacare will benefit some sectors more than others, but poor economy and pricing pressures are the biggest challenges most health-care firms must face.

Philip Guziec, 10/15/2012

This article originally appeared in the October/November 2012 issue of MorningstarAdvisor magazine.  To subscribe, please call 1-800-384-4000. 

When the U.S. Supreme Court upheld the individual mandate in a narrow ruling on June 28, a main hurdle for health-care reform was cleared, and with it, an uncertainty that hung over the sector. Now, health-care companies can focus on adapting to reform and overcoming their other challenges, such as pricing pressures, government cost-cutting, and the poor economy. To learn more about the outlook of the health-care sector, I sat down with Alex Morozov, director of the health-care analyst team at Morningstar, and Damien Conover, Morningstar’s director of pharmaceutical research. Our discussion took place Aug. 22.

Philip Guziec: The big news over the summer in the health-care sector was the U.S. Supreme Court ruling on the Affordable Care Act, otherwise known as Obamacare. We also have an election coming up in November. What do these events mean for the health-care sector?

Alex Morozov: The Supreme Court reaffirmed that the cornerstone of Obamacare—the individual mandate—is constitutional. We think that the ruling is the final chapter of the Obamacare debate. The November election could throw a wrinkle into the whole thing, but a perfect storm would have to occur for the Republicans to gain enough political advantage to repeal the act. In addition to winning the election for president, Republicans have to get filibuster-proof majority in the Senate. Right now, that looks like a long shot. Without gaining the presidency or an overwhelming majority in the Senate, Republicans could still find ways to tie up parts of Obamacare using budget maneuvers, but it’s a potential landmine for Republicans. Even though right now the public is split on Obamacare, many of its provisions have already been put into place. Once the public starts realizing the benefit of some of these provisions, restricting them is going to prove to be very challenging for Republicans.

So, at this point, we’re assuming that Obamacare will stand regardless, and what the individual mandate does for the health-care sector is that it allows companies to capture the upside of Obamacare. More than 30 million newly insured people will enter the health-care system.

Damien Conover: Another aspect of the November election is that no matter which party wins we expect a return of Washington’s focus on cutting the federal deficit.

One element that is very likely to happen, because both parties agree on it, is something that will have an impact on big pharmaceutical firms: coordinating the costs of dual-eligible patients. Currently, if a patient is eligible for both Medicare and Medicaid, he gets reimbursed at Medicare levels, which are about 30% higher than Medicaid prices. There is a lot of support to eliminate this difference. If it goes through, big pharmaceutical companies would take a 2% to 4% hit.

Dual-eligibles is just one area where the government will look as it returns its focus to cost-cutting initiatives. And again, this will probably happen no matter who wins in November.

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