The healthcare sector comprises different industries, ranging from managed care organizations, healthcare facilities providers and medical devices manufacturers to biotech and pharmaceutical companies. Consequently, we believe that investors in this sector should be mindful of the different drivers and appropriate metrics associated with the various sub-sectors.
In the present scenario, investor sentiment in healthcare continues to be driven by decisions in the Congress related to government funding and the state of the broader economy. In view of the ongoing healthcare reform debate in the Congress, healthcare policy changes remain an important indicator to investing in the sector. The Health Bill intends to cover nearly all Americans by providing government subsidies to help pay premiums irrespective of health or income.
President Obama has made a last-ditch effort to revive the stalled U.S. healthcare overhaul with a plan to make insurance more affordable and to bolster government authority to regulate premium hikes. The plan, which aims to break an impasse in the U.S. Congress, intends to provide coverage to millions of uninsured Americans and set up federal monitoring of private insurers' rate increases. The President's proposal comes following months of debate on reform in the Senate and House of Representatives over their respective legislation.
As per the plan, health insurers would have to spend at least 80% of their premiums on medical care, a move that could result in penalties for 16% of health insurers. Furthermore, the proposed plan intends to penalize health insurers who spend more than 20% of premiums on operational costs, such as salaries and marketing.
Exorbitant rate hikes and profit margins became the subject of public debate after WellPoint Inc. (WLP) issued letters to the policyholders of its subsidiary Anthem Blue Cross in California, warning them of steep rate hikes.
Recently, the U.S. House of Representatives voted to strip health insurance companies of a 65-year-old antitrust exemption. The 406 to 19 vote aims to repeal an antitrust exemption that has meant that states take the lead in enforcing antitrust law for health insurers.
We are positive on Health Net Inc. (HNT) on which we have an Outperform rating. While we remain concerned about the decline in membership, we believe a gradual improvement of the US economy should improve its membership status. Moreover, a strong balance sheet should enable it to tackle the current scenario.