Thursday, July 2, 2009
Medical costs are spiraling out of control.
Right now, the U.S. health care industry represents 18% of GDP. But as its current growth rate, the medical industry will make up 35% of GDP by 2040. Medical inflation outpaces wages, employment, GDP, and every other economic benchmark. It's unsustainable.
Obama is determined to tame the health care beast. I'm betting his tinkering will do just the opposite. Here's why...
Our current health care system is a "fee-for-service" model. Doctors and hospitals receive payments from private and government-run insurance for services provided to patients. Individuals only pick up the tiniest portion of the tab. Such a system pushes practitioners to do more "stuff" to make more money and patients to demand excessive exams and procedures.
And our "defensive medicine" system has only made the problem worse. Doctors prescribe boatloads of useless tests and medications out of fear of getting sued. The result: The U.S. spends more on health care than every single country on the planet.
To contain costs, we must ration care. But that solution is a political atomic bomb. Try telling a 65-year-old Florida retiree his health care access is restricted. Even the most popular politician in the world can't make the case.
So it's no surprise Obama's current reform strategy focuses on extending coverage. It will cost $1 trillion over the next decade to cover the country's 46 million uninsured. Who's going to pay for it? Obama wants concessions from various health care providers (drugmakers, medical device manufacturers, hospitals, doctors, etc).
But at best, a health care expansion plan can only hope to break even. The new costs will offset any savings. No actual savings will accrue. Instead of shrinking, the medical pie gets bigger.
Let's take the recent cost savings deal Obama struck with pharmaceutical companies as an example of what's to come...
In the much-ballyhooed deal, the biggest drugmakers in the U.S. will provide a new 50% discount on drugs for Medicare Part D beneficiaries in the "donut hole." (Patients enter a coverage gap after Medicare pays for the initial $2,510. They need to pay the next $3,216 out-of-pocket before Medicare coverage resumes.)
The 50% gap discount will cost drugmakers $80 billion over the next decade. But it's still a sweet deal for them. This discount will prevent patients from switching to cheaper generics. Since most of the top-selling drugs in Medicare Part D are brand name, Big Pharma may actually come out ahead in spite of the 50% discount.
If Obama ultimately succeeds in expanding health insurance to every American, health care providers will get an additional 50 million new clients overnight. Sales of drugs, tests, and medical devices will likely soar. One thing is certain: When people have insurance, they use more health services and buy more medications.
As longtime Growth Stock Wire readers no doubt know, my colleague Rob Fannon and I have been bearish on Big Pharma for a long time. For years, sales have been declining, and the companies have stopped innovating like they used to.
But thanks to Obama, Big Pharma is set to grow again. Once investors realize how the "reform" will increase Big Pharma profitability, they will jump onboard. I believe a new bull market for drugmakers is only months away.
If you are looking for a simple way to play this trend, the Health Care Select Sector SPDR Fund (XLV) is your best bet. The exchange-traded fund holds the largest drug and device makers in the world. And it has a low expense ratio of only 0.24% to boot.
If Obama marches onward expanding health care access without cutting costs, you can expect returns of at least 20%-30% in the next 12 months.
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