The Health Care Trends You Should Know Before November
Health care in the election spotlight... The war on prescription-drug costs... What Trump's orders show... It's a good start... The health care trends you should know before November... Five sectors to watch...
We're less than 80 days from the presidential election...
And, health care is front and center in voters' minds.
The global pandemic brought on by COVID-19 continues to ravage the globe. Right now, the worst place to be, statistically speaking, is the United States.
This country leads the world with over 5.4 million confirmed cases and more than 170,000 reported deaths.
Testing continues to become more widespread, and that plays a part in these numbers, but at the same time, the number of people testing positive, or the positivity rate, is also growing.
It bottomed in mid-June at about 4%... but then doubled to over 8% and has fallen back recently to 7%.
This rate is also a proxy for how prevalent the disease really is.
If 7% of people getting tested for COVID-19 are positive, then how many people not being tested are positive? The disease is likely more prevalent than the daily numbers suggest.
This is all to say debates about health care aren't going away anytime soon...
I (Thomas Carroll) said and wrote this many times even before the pandemic... Health care was likely to be a top talking point when it came to the 2020 presidential election.
Health care is again a top issue for voters heading into the 2020 presidential election. A recent Politico writer referred to health care as "arguably the top issue in the Democratic primary and potentially a deciding issue in the general election, too."
Today we can cross out "potentially"...
The debates about everything... public schools re-opening, colleges opening and closing, and on and on – and it all comes back to one thing...
Health care is going to be the No. 1 issue for the election.
Last night, a few questions emerged from the start of the virtual Democratic National Convention... Like, is there support within the party for the Affordable Care Act (Obamacare)? Or is a compromise on some kind of "public option" more likely?
I've spent two decades analyzing the health care industry and stocks. I can't stress how big these discussions are for investors today. Health care accounts for roughly 18% of the U.S. economy.
So in today's Digest, I want to set the stage for what's to come in the health care industry no matter who wins this November...
I'll start by detailing what's been going on behind the scenes in the industry lately, explain why what you hear about health care changes between now and Election Day might sound a little "backwards," and size up what I see as the smart investments in the months and years ahead.
We'll start with some recent presidential action...
On July 24, 2020, President Donald Trump wielded his presidential pen and inked four new Executive Orders. These were directly aimed at the U.S. health system, specifically prescription-drug prices.
The four orders covered the following drug topics:
- End "kickbacks" by middlemen that add to overall prescription drug costs.
- Reduce prices for insulin and epinephrine (common treatments for a variety of conditions) delivered through Federally Qualified Health Centers. These are provider locations that serve uninsured and underinsured people.
- Allow states to reimport prescription drugs from other countries.
- Ensure that the Medicare program pays no more for certain drugs than other economically comparable countries.
In spirit, these are great goals. In reality, they can't be accomplished within the current system. The U.S. retail prescription-drug industry is a $360 billion complex market.
I've described the inherent problems in our system before. I wrote last November that the government's interest in "doing something" about health care dates back to 1912...
That's when President Theodore Roosevelt included health insurance in his campaign platform. But it wasn't until 1965 that President Lyndon Johnson signed into law the first comprehensive health care coverage for aged and poor Americans – Medicare and Medicaid.
Since then the Clinton, Bush, and Obama administrations have tried different approaches to expand coverage to as many people as possible. Despite their successes and failures, all of these efforts have succeeded in doing one thing – creating massive uncertainty.
In my opinion, the signing of these recent orders is much more of a 2020 presidential election move than it is a real attempt at policymaking.
In addition, the orders called for the Department of Health and Human Services ("HHS") to put the orders into practice in 30 days, which is a week from today. We know nothing much of any scale, especially in the unwieldy health care industry, can happen in 30 days.
But let's put politics aside. I have three observations about these orders...
1. They are a recognition of a problem.
The current administration has talked very tough about drug prices. In fact, the administration believes it has suggested the toughest stance in history. Consider HHS Secretary Alex Azar's recent comments...
President Trump has already done more than any other President to lower drug costs. No President has ever taken action on drug prices as bold as any one of today's individual actions.
If this position is for real, then Trump will look to make productive changes should he be re-elected.
2. It's a good first step.
Drug price changes are just the start of what could be comprehensive reform. Keep in mind, retail prescription-drug costs are estimated to approach $360 billion in 2020. That is a lot of money.
But relative to all health care spending, it's about 17%.
Said differently, if policy makers are able to cut drug costs in half through any means, it would impact total health care spending by about 8%. Is this meaningful? Yes. Is it a total game-changer? No.
So why is it a great place to start?
Health care consumers (all of us) understand how to get and take prescription drugs. It's a part of the complex system we mostly understand.
It is easy to get a prescription from our doctor, go to the pharmacy, and have it filled. Then we pay for it and take it home.
Compare this to having open heart surgery. We have no idea where to begin. We are 100% at the mercy of the system.
Effective prescription-drug policy is a great gateway to more improvements in the system.
3. At their heart, these orders embrace a single-payer system.
I will now use my favorite teenage boy comment: "Wait... what?" Is that right?
Yes. Other than the "kickbacks" to middlemen, each of these orders anchor themselves in government-run health care systems, which most people would probably associate with Democrats in the U.S.
The term re-importation (the language in the third order I listed) means buying drugs from another country at a price just higher than their regulated prices.
This is only possible because of the government run, single-payer health care systems embraced by other global economic powers.
The re-importation order goes on to encourage each state to develop its own re-importation policies.
But the orders don't stop there. They explicitly call for Medicare price-setting for drugs directly related to single payer systems. Medicare is the $860 billion health insurance program for people 65 and older.
The fourth order signed by President Trump calls for Medicare drug prices to be benchmarked against the government price setting of other countries.
Without knowing it, President Trump has embraced a central tenet of robust single-payer systems – price setting.
I find this to be incredibly interesting...
A week after these orders were signed, Trump signed another one about prescription drugs.
The July 6 order calls for a government dictated list of essential medicines and supplies that can only be procured from U.S. companies.
What can we conclude from these three observations and the latest order from Trump?
Regardless of who wins the election, health care is on the front burner and changes are coming.
Remember, this is an industry in which we are all customers regardless of your political beliefs. Trump or Joe Biden will both shake things up.
Has anyone else noticed Trump has called himself "The Healthcare President"?
Assuming this is not a campaign stunt as Democrats have suggested, Trump could create a robust health care investment environment in his second term.
How so?
The GOP may finally have its shot at fixing U.S. health care and taking credit for it...
For regular readers of my health care opinion, you know that I am not a fan of the current system. It is widely inefficient, costly, and leaves many Americans uncovered.
However, I'm also not sold on European-style governments or single-payer systems, either. Those models offer less inequity but leave little room for innovation.
And as I wrote in the February 21 Digest, when discussing Elizabeth Warren's and Bernie Sanders' aggressive, single-payer reform proposals...
Switching to a single-payer system would throw the entire economy into upheaval...
The fix for the U.S. will be something uniquely American. It must cover everyone, allow for innovation, and offer the option to buy a better product.
And we've got a head start on just such as system. It's actually been in place since 2014 – the Affordable Care Act ("ACA").
On its face, the ACA was one of the most politicized pieces of legislation in history. In order to get passed, it had to offer everything for everyone. It had to please all people all the time.
As we know, that is impossible.
Upon my initial review of the law 10 years ago, I referred to it as one of the worst health care reform efforts in history. BUT – it did something very important.
It took an important step in reforming the system using a blend of private-sector innovation with public-sector oversight.
This is a uniquely American solution...
It had some success. For example, the state health insurance exchanges offered robust health plans provided by the private sector you could own yourself at a reasonable price.
But it mostly failed because it attempted to do too much. And Republican efforts to restrict it at every turn did not help. I see it as the Democrats building a car, Republicans removing three wheels, and then claiming the car does not work.
The ACA remains the law of the land but has not succeeded as planned. But guess who will embrace the ACA and make it better?
Joe Biden. As vice president to President Barack Obama, he was key in getting the ACA written into law. And he has promised to pick up the pieces of the ACA, fix the initial problems, and resteer it toward its original goals.
And Trump may also embrace it. He's been signaling his interest in fixing a troubled system, and the ACA is actually aligned with the ideas from government-run, single-payer health systems that Trump is pulling from in his recent orders.
Regardless of the winner, health care reform efforts are bound to heat up again...
And while the system is complex and I'm not a fan of it, I also know if you understand what's going on, there's room for investors to profit from the inevitable changes too. As I wrote last November...
The constant scrutiny and debate surrounding the sector has made health care stocks very sensitive to proposed government changes. So many institutional investors totally steer clear of them.
And that makes health care great for investing... It's complicated, but if you understand health care, it gives you an edge.
Said another way, there will be winners and losers just like there were a decade ago when the ACA was first written into law.
We've already seen some of this.
Early last year, as talk of "Medicare for All" heated up, many health care stocks, like private insurance firms Anthem (ANTM) and UnitedHealth (UNH), tumbled... as we warned would happen.
Some of these stocks that fell became great buys because, as the market realized, Medicare for All is not a practical policy.
But it made for some great soundbites.
Going forward, I'll be writing about many of the same companies I have over the years, but updating the analysis and outlook based on our everchanging circumstances.
Let's look at the different investable parts of our health care system...
Currently, managed care organizations ("MCOs," or health insurance) are fairly valued. They were incredibly fantastic buys as the market tumbled in March and rebounded quickly.
That said, we'd prefer to take profits with MCO stocks versus putting new money to work.
These are stocks such as Anthem, UnitedHealth, and Centene (CNC). These companies will continue to beat expectations this year, but the COVID-19 medical expense slowdown will not last forever.
More importantly, the market has already digested this information.
Hospital companies may once again be in the crosshairs. Their real cost to the system will be on display as prescription-drug players protect themselves against attacks like Trump's recent orders.
Consider what I call "the medical dollar"...
In the table below, you can see that in 2018 hospital spending accounts for $0.50 of every dollar spent on health care.
We would tread very carefully with stocks such as HCA Healthcare (HCA), Tenet Healthcare (THC), and Universal Health Services (UHS). They are ripe to be impacted directly by reform.
(Note the "average" family in the table is considered a hypothetical American family of four.)
Despite the focus on drug costs, pharma and biotech will offer investment opportunity because of the current pandemic.
Vaccines will be developed and sold. Other therapies will be discovered and used in concert. These will drive revenues and stock prices. Moreover, COVID-19 has likely jumpstarted efforts against the next pandemic.
Make no mistake – it is coming.
My friend and colleague John Engel, editor of the Stansberry Innovations Report, has a lot of experience with this sector. (Related, I joined him in a video interview that we share at the bottom of today's Digest.)
John agrees that pharma and biotech companies will be a hotbed of investment opportunity. However, he also wants investors to look at the "pick-and-shovel" companies in this space.
These are the companies that provide the tools for pharma and biotech to create amazing medicines. He recommends investors consider companies such as Thermo Fisher Scientific (TMO) or Agilent (A), which help pharma companies make their medicines.
Another secular change is impacting health care too – the aging population.
Senior housing and health care solutions targeted toward our nation's seniors will see increasing popularity driven by secular change.
Consider people born in 1940. They will turn 80 years old this year. This is the sweet-spot age for senior, assisted, and skilled nursing living. And this trend will last for 20 years as the Baby Boomers age.
But what really interests me right now is something called "digital health care."
Increasingly, we will see investment opportunity in this area offering disruptive solutions to our health care challenges.
For example, consider a company called Teledoc Health (TDOC). This is a telemedicine company that is gaining real traction.
A number of its products and services began to get reimbursed by Medicare in January 2019. And year to date, the stock is up over 150% as COVID-19 showed us how much our health care system needs updating.
But the story here continues... On July 5, Teledoc Health and Livongo Health (LVGO), another telemedicine company, agreed to merge. The deal is valued at $18.5 billion. Livongo is up more than 430% year to date.
This deal is a gamechanger for digital health care. Health care and tech investors alike will accelerate their research into organizations such as these.
The real money is about to start flowing in...
It's really been happening for a decade...
From 2011 to 2019, $40 billion has been invested in startup and private health care companies. These companies will be acquired by publicly traded companies and drive stock valuations.
Many will hit the stock market with initial public offerings (IPOs) as well.
This is all to say, regardless of who wins in November, health care will again be front and center in the years ahead.
So now is great time to become more familiar with the companies that service our No. 1 asset – our health. There will be great investment opportunities that pop up if you know where to look.
Among other places, we'll be tracking these trends in our Stansberry's Investment Advisory newsletter.
We already hold a handful of what our research team calls "Future of Medicine" stocks, and we won't hesitate to recommend more in the industry if we see a good opportunity.
I know I'll be watching for them. If you don't already subscribe to our flagship newsletter, click here to learn how you can get started with a risk-free trial today for only $49.
How to Trade the Drug Price Wars
Tom Carroll and John Engel recently chatted with our Jessica Stone about how investors can profit from the White House's plan to cut drug prices.
Click here to watch this video right now. For more free video content, subscribe to our Stansberry Research YouTube channel... and follow us on Facebook, Instagram, and Twitter.
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In today's mailbag, feedback on yesterday's Digest about Warren Buffett buying gold and what we erroneously said was a large portfolio position, even for him... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"If my math is correct, and that's a BIG if, Buffett's portfolio is over 1000 times bigger than its market value." – Paid-up subscriber Luis A.
Corey McLaughlin comment: Your math is correct. Mine wasn't. That was a typo, and we regret the error. Same with the confusion under the gold and negative-yielding debt chart. Thanks to all who elegantly pointed these out.
"I'll save the sarcasm on the $627 billion... Typo aside, he invested in a company that mines a product in high demand. It also pays a dividend. It's right in line with his philosophy. And I don't like the guy but had to comment here." – Paid-up subscriber Gregory H.
Happy investing,
Thomas Carroll
Baltimore, Maryland
August 18, 2020