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Healthcare Stocks in Focus on Latest CBO Report

Healthcare stocks are back in focus as the “Repeal and Replace Obamacare” scenario plays out. A lot has been happening in this part of the medical sector with efforts to “Repeal and Replace Obamacare” not meeting with much success and basically collapsing.

A quick look at the events that have unfolded over the past few months shows that “Repeal and Replace Obamacare” has been a key goal for President Trump who had said that his first course of action, once elected, for Obamacare would be to ask Congress to repeal it immediately. However, the President and Republican party leaders first suffered a setback in March this year with a healthcare bill (the American Healthcare Act or Trumpcare) being pulled from the House floor when it became clear that there would not be enough votes to pass the bill.

Then in June, the Senate issued its version, the Better Care Reconciliation Act of 2017, with certain changes being made -- however, four Republican Senators (Sens. Rand Paul, Ted Cruz, Ron Johnson, and Mike Lee) issued a joint statement saying that they were not ready to vote for the bill due to several reasons but were open to negotiation and obtaining more information before the bill was brought to the floor. While the Senators acknowledged that the draft bill was an improvement to the current health care system, they noted that it did not appear to accomplish the goal of repealing Obamacare and making health care more affordable.

Last week, the Senate came out with a revised version of its bill but this too failed to garner full support with Senators Mike Lee and Jerry Moran announcing earlier this week that they will not vote for the current version of the bill. Moreover, moderate senators were concerned by the cuts to Medicaid.

Repeal Now, Replace Later

With efforts to “Repeal and Replace Obamacare” failing, the focus has now shifted to repealing Obamacare without an immediate replacement -- the Obamacare Repeal Reconciliation Act of 2017. But what will the repercussions be if such a move is taken?

According to a report issued by the Congressional Budget Office (CBO) yesterday, enacting this legislation would cut federal deficits by $473 billion over the coming decade. However, the number of uninsured people would go up by 17 million in 2018 and average premiums in the nongroup market would increase by about 25%.

Once the ACA’s expansion of eligibility for Medicaid and subsidies for insurance purchased through the marketplaces established by the ACA are eliminated, the number of uninsured Americans would go up by 27 million in 2020 with premiums rising about 50%. 2026 would see the uninsured go up by 32 million with premiums doubling compared to the current law. Given these numbers, it doesn’t seem likely that “Repeal Now, Replace Later” will get much support.

Impact on Healthcare Stocks

As the “Repeal Now, Replace Later” scenario plays out, hospital and insurance stocks will remain in the limelight. Insurance stocks have had a very strong run so far in 2017 with the Zacks-categorized Medical - Health Maintenance Organization (HMO) industry outperforming the S&P 500 with the industry climbing 22% compared to the overall market gain of 10.7%. Not surprisingly, the HMO industry is among the top 13% of the Zacks-ranked industries with key players like Aetna Inc. AET and Anthem, Inc. ANTM holding a Zacks Rank #1 (Strong Buy) while Magellan Health, Inc. MGLN and UnitedHealth Group Inc. UNH are Zacks Rank #2 (Buy) stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Hospital stocks have also had a pretty decent run so far this year though this sector will be under pressure if Obamacare gets repealed without a suitable replacement. This is because hospitals benefited under Obamacare with more than 20 million people gaining coverage. Repealing and/or replacing Obamacare without a suitable replacement would result in a significant increase in the uninsured population which does not bode well for hospitals. The Zacks-categorized Medical-Hospital industry is currently among the bottom 30% of the Zacks-ranked industries.

With healthcare reform expected to remain a key topic of discussion, expect volatility and uncertainty in this corner of the healthcare market in the near-term.

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