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The analysis below is taken from this morning's Healthcare First Look, a daily piece that marries top-down macro and bottom-up fundamental analysis with the intent of delivering actionable investment ideas within the Healthcare sector. Institutional subscribers and trialers, please email sales@hedgeye.com if you'd like to hear more about the work Tom Tobin and Christian Drake are doing within the Healthcare sector at Hedgeye.

Karl Rove was a little taller than I expected.  He was also more analytical than I expected in his prediction of the midterm elections.  While his analysis has political underpinnings, those views were not the core of his call.   His primary source of data was simply available polls with some colorful anecdotes from meetings that come from having Karl Rove’s rolodex.  At the end of the day, it was a familiar process to which just about every Wall Street fundamental analyst subscribes.

Whether it is Karl Rove’s analysis of publicly available polls, or Professor Ray Fair’s national data analysis (Bloomberg 9/8/2010), or the current $70 price on the Intrade contract, Republicans will likely resume control of the House of Representatives.  This has implications for real policy changes, or the minimum, the lack of progress.

For Healthcare the important themes that fall out of a Republican House of Representatives are as follows.

 

Deficit Reduction/Spending Cuts

Healthcare spending is the key contributor to long run federal and state spending.  With the political discussion having already moved to “paying for” new spending with budget reductions, the policy shift is already in place. 

 

Redistricting

Longer term, the election implications extend spending pressure from a Republican election advantage for many years to come from redistricting.  The trends in support for Republicans retaking the House are affecting Governor races as well.  With the 2010 Census being implemented through redistricting, and key states led by Republican Governors and Legislatures, there may be a long term Republican advantage.

 

Policy Implementation:

 

Public Hearings:  Karl Rove suggested Republican Committee Chairman would use hearings to affect change.  He specifically mentioned the idea of calling Dr. Berwick, who was President Obama’s recess appointment to head CMS.   Based on Dr. Berwick’s record and public comments (also easily found with a browser) political pressure from a Socialist label, while politically valuable, may also handcuff him administratively.

 

Health Reform Rules:  Investigating the affect of Health Reform on employer sponsored health insurance seems another likely topic.  Both a contact of Karl Rove’s and one of mine, both of whom run small businesses, will likely drop coverage for their employees saving money by paying the smaller penalties set up by the legislation.  Again, an easy political point to raise, but one that may also impact HHS decision making as specific policy rules and guidelines are written.

The market seems like it should get this, as all of the analysis is based on data readily available with a browser.   The Intrade contract crossed 50% odds at the beginning of July and made a massive move in August.   But looking at the performance across Healthcare subgroups since July 1 and August 1, there is not a clear pattern across individual stocks.  

The only standout has been Managed Care, which has led across both periods and clearly would benefit from moderation in Health Reform implementation, or the long odds of Health Reform repeal.

TAKEAWAYS FROM MEETING WITH KARL ROVE - 1

 

TAKEAWAYS FROM MEETING WITH KARL ROVE - 2 

 

The low-volume action continued yesterday as broader healthcare and the XLV dropped 120bps & 60bps, respectively.  Internals were mixed with the A/D across our aggregate index at 14%/86%  while total volume held 12% & 21% below the 10-day and 30-day averages.  The XLV currently sits positive TRADE & TREND in the HEDGYEYE Sector Model closing 2 cents above the TREND line.  The next level of TRADE resistance remains north at $29.31

Generics outperformed yesterday on the back of BVF which ran for 10% following positive P&L news out of VRX.  Generics currently sits as the lone subgroup flashing positive divergence across durations in our 1 STD subsector divergence model.

BMY’s string of pearls strategy got its next pearl in the form of ZGEN as the company made a $885M move to consolidate its HCV product line and further buttress its pipeline with mid-to-late stage prospects.   

Insurer’s are back in the headlines with Aetna & the Blue plans announcing the need to raise individual & small business rates to offset reform related provisions.  According the WSJ (Here) the reform provisions, including “letting children stay on their parents' insurance policies until age 26, eliminating co-payments for preventive care and barring insurers from denying policies to children with pre-existing conditions, plus the elimination of the coverage caps” relate directly to the premium growthInterestingly, its these same provisions that continue to score well in Kaiser’s Health Tracking Poll (you can find the latest Kaiser poll results Here). Managed Care dropped 1.0% to start the week, but has outperformed over the past two weeks and is the best performing subgroup since July 1st.

Meanwhile, healthcare continues to take baby steps towards a consumer based model as consumer reports (NYT article Here) has begun rating surgical groups based on heart bypass surgery.  This coincides with a push by federal and local agencies to increase transparency & price discovery through online posting of surgery/therapy costs by insurer’s and providers.

TAKEAWAYS FROM MEETING WITH KARL ROVE - 3

 

TAKEAWAYS FROM MEETING WITH KARL ROVE - 4

Thomas Tobin

Managing Director

Christian B. Drake

Analyst