As we said on our recent MACRO strategy call healthcare is our favorite sector. Following that call we wanted to share with you a very important post that our healthcare Managing Director Tom Tobin just published on Senator Baucus' new Healthcare proposal:
It's not time to jump up and down if you're long Managed Care like we are or press the short. The legislative process has a long lead time, even from here, combined with consensus growth that looks meager and multiples well off the lows. The Baucus bipartisan proposal is finally here, with no Republican support, representing a milestone, but not the end of the process.
With Baucus finally getting his proposal on the tape, and many interested parties (Rockefeller on the Left/Center, Sen. Enzi on the Right) against it, there is what we called this morning a Steel Cage Match going on in DC which seems better understood as a way to assess blame than pass legislation.
220+ pages is a lot to get through and I am sure I missed something, but all I really cared about was the language around the Co-op, the alternative to the Public Plan. Specifically, how will a co-op set its prices it pays for services? Adopting Medicaid or Medicare list prices would be a disaster for the Managed Care Industry. Layering a margin on top of less than market prices, and passing the premium through a tax free model would make the Co-op premium cheaper by a wide margin. From looking through the document, there is no language about how the Co-op will set prices paid for services. This makes setting up a provider network of hospitals and physicians extremely difficult in a business as local as Healthcare. You can't just parachute into a market and set up shop with no members to show the provider and no providers to show the members. That is, unless you are willing to spend a great deal of your own, or other people's money.
UNH is having a solid day so far, but has been unable to recover the losses from yesterday and make a new high. Trading in the upper half of its range since July, when it became increasingly clear that the opposition was getting its act together and President Obama's approval rating began to slide, Baucus's proposal was perhaps an open secret. The short position is minimal, and while employment appears to have a shot at getting better, the slow-growth or no-growth recovery seems like consensus.
However, I can identify a number of factors supporting the long case here and higher numbers through 2010.
- Health Reform neutral to positive (no plan at all, or Co-op a weak competitor with new tax credit supported enrollment)
- Inflation pushing investment income yields higher
- Accelerating Premium Growth (anecdotal, PPI trends, PCE trends, company statements)
- Age Mix of enrollment reversing and dampening cost trend (see "Fire the Young..." post)
- Higher than consensus GDP in Q4
- Inflation hitting purchasing power of the consumer, putting pressure on cost trend
Here's the link to the Baucus proposal...
Intrade quote telling me consensus is for no Public Plan, putting the focus back on fundamentals and Macro, or putting the Tail risk in it re-emerging, but I doubt it.