Saturday, September 17, 2016

a look at the ACA

We know readers fall on both sides of the aisle, with some despising the ACA and others loving it. We offer no opinion on the validity of either side, but simply look at the economic and investment developments.

Proponents of the ACA, including many in the health care industry, promised that consumers would have more choices for insurance, use emergency rooms less and have lower costs. And investors believed many of those assurances, as stocks in much of the health care sector rallied in the years following the 2010 passage of the ACA.

Unfortunately for investors, those promises haven’t come to fruition yet.

There is no doubt that more Americans now have insurance: The nation’s uninsured rate has dropped to 8.6%, the lowest level on record, according to the Department of Health and Human Services. The department credits the ACA with adding 20 million to the ranks of the insured. But many have not ended up with more insurance options.

The problem stems from the estimated 30 million that remain uninsured. Many who have failed to get insurance are healthier, younger consumers. Insurance companies were expecting that group to seek insurance and help subsidize the costs of consumers with immediate health care needs who were quick to seek insurance coverage on the exchanges.

With a lower-than-projected number of younger, healthier patients seeking coverage, several major insurers have taken financial losses and exited the so-called ACA health care exchanges. This has resulted in a projection of about 31% of rural customers having only one insurance provider option in 2017, up from 7.8% in 2015, according to

It doesn’t appear the ACA has led to fewer emergency room visits or lower health care costs either. A 2015 survey of the American College of Emergency Physicians shows emergency room visits rose over the previous 18 months.1 And the average insurance premium increase requested for 2017 is roughly 23%.2 It’s not just insurance premiums that are rising. Out-of-pocket health care payments are increasing at an annual rate of 5.1%,3 more than twice the rate of inflation.

So now there are growing calls to “fix” the ACA, with one group calling for more government intervention and another calling for completely scrapping the system. And the recent EpiPen controversy has dragged politicians even further into the fray, with politicians from various corners calling for price caps and more regulation. This raises our level of concern as government involvement typically doesn’t bode well for corporate profitability.

But while things have looked dour recently, we aren’t quite ready to throw in the towel on an industry that means so much to the vast majority of consumers and are keeping our marketperform rating on the group … for now.

Drugmakers have quickly responded to the government threats by walking back some recent price increases and promising more restraint in the future, which could lessen the furor toward the group.

Additionally, we are seeing great potential in the biotech area, where stocks have fallen recently, but are starting to look more reasonably valued.

And there are few doubts that given the above demographic trends, demand for health care services will increase in the coming decades. In fact, the Bureau of Labor Statistics estimates that 50% of the fastest-growing occupations between 2012 and 2022 will come from health care industries. With that amount of industry growth forecasted, it is difficult for us to downgrade the group, despite recent disappointing performance.

But if the tide toward more government involvement grows, we would likely be forced to do just that.

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