The Next Round of Health Care Reform Has Begun, and We Know the Winners

One of America's worst laws lives on – thank goodness... The next round of health care reform has begun, and we know the winners... An investment idea that has held up for more than a generation... The tailwinds for these two stocks are only getting stronger...

Editor's note: Our colleague Dan Ferris is taking some time off this week and won't be writing to you in his regular Friday slot today. But don't worry... in his place, we have a special guest essay from another wise, experienced editor on our research team – Thomas Carroll.

Thomas, the editor of our Cannabis Capitalist newsletter, worked as a health care sector analyst for roughly 20 years before joining Stansberry Research in 2019. Institutional investors, newswires, and health care-focused publications all used his research... as did financial-news outlets like CNBC, Bloomberg, and Fox Business. And at one point, Fortune magazine ranked Thomas as the No. 1 U.S. health care analyst.

In today's Digest, he'll explain how a key turning point in one of the largest industries in the U.S. is flying under most investors' radar...

The Affordable Care Act ('ACA') is one of the worst pieces of federal legislation in modern history...

Why? Well, if you really want an earful, come find me (Thomas Carroll) at this year's Alliance Conference in Las Vegas this October.

But in a nutshell, the law tried to do too much...

It tried to please everyone, all the time. And as we know, that's impossible... So health care stocks were very volatile for years while the details of so-called "Obamacare" got worked out.

This made my old job as a health care sector analyst very difficult.

You can raise all kinds of points about the problems with the ACA... For example, it created a minimum level of benefits that were very generous. It essentially mandated Cadillac benefits when a Chevy would do just fine. This made it very expensive and tough for employers and the uninsured themselves. But even I must admit it did do something very, very good...

It took the first step toward making the U.S. health care system the best in the world.

My belief has been that the ACA was the first step in health care reform... and that it would be a catalyst for future steps. In turn, those future steps would make the law better and improve U.S. health care as a whole.

As investors, that would give us more opportunities to make money around these changes.

But that hasn't happened – yet...

The Trump administration wasn't interested in making any Obama-era laws better. When it came to the ACA, it tried to dismantle everything it could. Some of the Trump administration's changes were good. But it also removed some key parts of the law that had actually improved the health care system.

On balance, the actions made a terrible law worse... and gave us no better alternatives.

In the big picture, the U.S. health care system has deteriorated over the past several years. The onset of the COVID-19 pandemic made its deep cracks obvious... Hospitals were overrun with patients. Personal protective equipment was in short supply. The number of available ventilators proved to be woefully lacking relative to our population. The list goes on and on...

But a major milestone in health care reform was achieved this summer. Few people know about it, but it could lead to a flurry of changes in health care...

On June 17, the U.S. Supreme Court upheld the most recent challenge to the ACA. This was the third attempt to invalidate the law in front of the highest court. And this third failure came with the biggest margin of defeat.

The conservative-leaning Supreme Court ruled 7 to 2 against the latest claim. I doubt anyone will mount any more serious challenges to the ACA. And that means, the Biden administration and future presidents can focus on improving the system.

The path is clear for the government to take the next steps in health care reform... And we can make some smart investments based on this recent Supreme Court decision.

What will kick off the next phase of health care reform...

The Biden administration should soon turn its attention to shoring up the ACA.

In fact, anyone paying close attention knows these changes have already begun... quietly so far. These changes will create a huge tailwind for a handful of stocks I know very well...

Few everyday investors will know about these opportunities. They will be seen only by institutional investors who focus on health care and other educated folks within the sector.

I don't want you to miss out.

For the past couple years, I've been writing and talking about the next big changes coming to our health care system... I've said over and over that there will be investment winners and losers across the sector. With the ACA cemented in law...

We now know who the big winners will be...

One of the best ways to invest around improvements to the ACA is through health insurance companies, also known in the industry as managed care organizations ("MCOs"). These companies will make great long-term investments...

I wrote about this almost exactly a year ago, in the August 18, 2020 Digest, when I noted that these stocks were fairly valued following a steep March sell-off at the onset of the pandemic...

You're likely aware that health care costs have soared over the past half century. From 1966 to 2016, health insurance premiums rose an average of 10.7% a year. Nobody likes to pay higher premiums... and that's a big part of the reason why so many people hate their insurance companies.

It's like you have no control over it... But wouldn't it be great to somehow soften the blow of rising costs by investing in this trend, making some of that money back and keeping pace with the higher costs?

As it turns out, we can do just that, right now...

You see, MCOs are the middlemen that reflect the cost increases...

They're the companies and government agencies that pay the hospitals, doctors, pharmacies, and other care providers.

These companies consolidate all health care spending into a single price paid for all services. To be viable businesses, their revenue must grow by the same rate as underlying costs. Otherwise, they will go out of business.

If health care costs are expected to rise 9% in the coming year, a large MCO will set its premiums to rise by at least that same amount. Said another way, these companies have a built-in price inflator that has averaged more than 10% for 50 years.

If you're a small-business owner, think of it this way... Wouldn't it be great to raise your prices every year by 10%?

As a health care analyst, this idea was the central focus of my investment thesis for health insurance companies...

It's an idea that has generated profits for a generation...

This built-in inflator has supported investments in the sector since these companies evolved into their modern-day versions more than 20 years ago. And I don't see this changing anytime soon.

These stocks have been some of the best-performing, most stable companies in health care (and in the market in general).

UnitedHealth (UNH) is a great example... It's currently the heaviest-weighted stock of the 30 in the Dow Jones Industrial Average. It makes up about 8% of the index today.

Look at UnitedHealth's steady returns versus the benchmark S&P 500 Index's over the past 10 years. Here's the thing... almost all MCO charts look like this.

Fortunately, as I said earlier...

The tailwinds for MCOs are only getting stronger...

The past and current presidential administrations have been a little busy.

Between the COVID-19 pandemic, stimulus funding, and last fall's election (and the fallout), not much "second order" business has been getting done in Washington, D.C. However, the Biden administration will soon turn its attention back to health care reform.

Just this year, one of the stimulus bills – the American Rescue Plan – allowed people access to subsidized health insurance beginning February 15 and ending August 15... That's an extra three more months than usual. In addition, it also included increased tax credits.

This was one of the first tweaks made to the ACA in years. And it will push more "customers" to the MCOs that actually manage the ACA benefits...

As of mid-July, more than 2 million people enrolled in the ACA during this special pandemic enrollment period. These new customers are driving new revenue to the MCOs. And as long as that revenue covers their medical spending, the MCOs will make a profit.

Biden has made other proposals recently – some good for the industry, some not so good. For example, the "standardized benefit package" is being considered... It would again mandate ACA insurers to offer standardized plan options.

UnitedHealth said that it would rather the law "permit" insurance companies to offer standard options, rather than mandate them... as the ACA did before a Trump-era rule that eliminated the mandate.

This is one of the things that isn't good about the ACA. It jammed too many benefits in, making the coverage too expensive. But the industry and Biden are now negotiating.

This is exactly what I've been expecting to happen. I only wish it began five years ago. The point is... this is the beginning of a new wave of health care reform efforts.

Have you ever heard of these stocks?

Two stocks that may directly benefit from these early adjustments to the ACA are Molina Healthcare (MOH) and Centene (CNC). Both companies specialize in government-run health care programs like Medicare, Medicaid, and ACA plans.

But I bet you've never heard of either of these stocks, which is part of the reason why they present a great opportunity... Not a lot of people invested in public markets know about them.

On its second-quarter earnings call, Molina reported a doubling of ACA enrollment, from 318,000 at the beginning of 2021 to 638,000 on June 30. The company also increased its total revenue and earnings outlook for the year.

Meanwhile, Centene also raised its outlook recently for the second time this year.

And yet, the market isn't fully recognizing these opportunities yet... Centene's stock is up only nearly 7% so far this year. That's much less than the S&P 500's 20% return in 2021. Molina is faring better... It's beating the broader market with a roughly 27% gain over that span... But again, that's nothing compared with the upside I expect over the long term as the ACA is improved. Molina will likely double its revenue from current levels in the next three years or so.

But you should know that both companies face some increased near-term risks...

Medical costs related to COVID-19 are on the rise, and management teams are beginning to discuss it. But these companies are well reserved to handle any blip in costs this year.

So if you're looking to get in early and capitalize on this long-term trend, consider buying CNC and MOH shares today.

Even better, this is just one example of how we can profit by understanding the market in which we are all customers – health care. I expect to see many more opportunities like this heading into 2022 and beyond...

New 52-week highs (as of 8/26/21): Motorola Solutions (MSI), Palo Alto Networks (PANW), Sea Limited (SE), and Waste Management (WM).

In today's mailbag, feedback for our Crypto Capital editor Eric Wade, whose latest work we quoted in Wednesday's Digest... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Eric, Your recommendations have allowed me and my family to make approximately 300% gains on our investments.

"We used a portion of the profit to purchase a well-needed, 'new to us' family vehicle in cash (no debt).

"We continue to leave a portion of the profit in our Crypto Capital portfolio because we believe it'll pay off even more.

"Thank you for all you and the Stansberry Research team are doing. Keep showing the everyday man/woman/family how to prepare for the future." – Paid-up subscriber Austin A.

Happy investing,

Thomas Carroll
Baltimore, Maryland
August 27, 2021