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Health Care Stocks in Focus as Repeal & Replace Gains Steam

Once again efforts are being made to repeal and replace Obamacare via the Graham-Cassidy bill.

This bill is another attempt to undo Obamacare, after repeal and replace efforts by Trump hit the rocks due to insufficient votes.

The Changes

A number of proposals included in the plan would alter Obamacare. Among  the most unpopular of these are putting an end to individual and employer mandate, giving a block grant to Medicaid, elimination of  Obamacare subsidies that lower premiums, deductibles and co-pays, and ending of cost sharing subsidies by 2020.

Strict provisions relating to pre-existing conditions are also likely to be loosened. While insurers will have to provide coverage for pre-existing conditions (something that Obamacare also required), they will have the ability to charge more to sicker patients.

Concerns of Industry Participants

In a letter addressed to the leaders McConnell and Schumer, America’s Health Insurance Plans (“AHIP”) expressed its concerns that the bill, if passed, might have on the health care industry. The group is of the opinion that the proposal fails to stabilize the individual insurance market, which provides subsidized plans to low-income people. It will also cause people with pre-existing conditions to fall out of the insurance net and disrupt the Medicaid market. This would make health insurance less affordable and unattractive, ultimately causing more people to forego insurance, thereby leading to an increase in the uninsured rate.

Bernard Tyson, chairman and CEO of the sprawling Kaiser Permanente nonprofit health system, also holds a similar view on the proposal.

Overall, the various participants of the health care sector remain unsupportive of the bill and are lobbying against it.

Impact on Health Care Companies

The companies having high exposure to exchange business and Medicaid such as Centene Corp. CNC and Molina Health Care MOH are likely to suffer the maximum earnings decline.

Hospital companies in general are expected to suffer from the likely increase in uninsured patients which will lead to a rise in uncompensated care and consequently increase their bad debt. Volumes will also be expected to remain under pressure as people shy away from medical help due to high deductibles and out-of-pocket costs.

Nevertheless, companies having more diversified operations such as UnitedHealth Group Inc. UNH, Aetna Inc. AET and Cigna are relatively better positioned to sail through.

The concern was reflected in the decline of 0.8% in the Health Care Select Sector SPDR ETF (XLV) on Sep 19, just after the proposal was made.

The health care sector has been in the limelight since Donald Trump took charge. Thenumerous proposals of repeal and replace , from time to time, has sent shock waves across the industry. The sector however, has been able to shrug off all concerns and perform strongly as evident by a gain of 18.8% year to date compared with the 11% returns by the S&P 500.  

Going Forward

Sep 30, is the deadline for the bill to pass the Senate with a simple majority vote (50 rather than 60), under the rules of reconciliation. The bill is fast gaining support, this time also likely from a key Republican governor, Doug Ducey of Arizona. This could lug along the support of Senator John McCain, who voted against the last repeal bill.

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Aetna Inc. (AET): Free Stock Analysis Report
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Centene Corporation (CNC): Free Stock Analysis Report
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