Despite market worries US insurers are in rude health after Obama bill
PRESIDENT Barack Obama had his moment in the sun last week when his healthcare reform bill was signed into law. The crux of the reform is the requirement for all Americans to have health insurance by 2014, which will affect more than 30m people who are currently uninsured.
The response to the bill in the financial markets was fairly mixed. Bond yields spiked temporarily, as investors worried about the impact the bill – estimated to cost nearly $1 trillion – would have on the US’s fiscal deficit. Large pharmaceutical companies saw their share prices move slightly higher, but it was the health insurers which suffered.
The largest health insurers in the US, including Unitedhealth Group, WellPoint and Amerigroup, all saw their share prices fall last week. The source of this negative sentiment was twofold: firstly the tough new regulations will forbid them from refusing to provide insurance to people with pre-existing health conditions; and secondly the US government will impose a new tax on insurers from 2014.
But, the flip side is that over the next four years there will be a large increase in the number of Americans looking for insurance. The market seems to be ignoring this fact, which offers an opportunity for contracts for difference (CFD) traders to take long positions in US health insurers over the medium-term.
Not all of the 30m uninsured Americans have pre-existing conditions. In fact, some who are currently uninsured choose to be so because they are young and healthy. But soon these people will be forced to purchase insurance. This is good news for the health insurers, since premiums they receive from fairly healthy individuals should cover the cost of extra claims from people with pre-existing conditions.
The health insurance sector is at an interesting crossroads, says Paul Dales, US economist at Capital Economics, the consultancy. “If the potential for growth exceeds the extra costs then health insurers should do well,” he says.
Investors should also look beyond the obvious companies in the healthcare sector. Killik & Co, the stockbroker, points out that Craneware, the Edinburgh-based company that provides software to automate billing and pricing procedures to healthcare organisations in the US, should benefit from the increase in the number of Americans purchasing health insurance. Likewise, analysts at Standard and Poor’s Equity Research expect biotech firms, such as Swiss firm Roche Holdings, who produce drugs using live cells rather than chemicals, to outperform in the coming months because Obama’s health bill gives them 12 years of competition-free sales.
There are plenty of opportunities out there for CFD traders with medium-term investment horizons. The change to healthcare dynamics in the US is an once-in-a-lifetime event that shouldn’t be missed.