Halloween is the time to discuss those things that go “bump” in the night. Will politicians become vampires, sucking the life out of your healthcare stocks? Or is the whole threat no more real than a nightmare that vanishes at first daylight?
Let’s sort out facts vrs. frights…
You probably don’t have to think back too far to remember the paralyzing feeling of fear that started in your stomach and slowly spread throughout your young body. Your mommy had kissed you goodnight, perhaps even tucked you into bed, and at first all went well. But you didn’t like the shadows that your night light cast on your childhood bedroom, and you especially didn’t like the fact that your closet door wasn’t fully shut. Because if your closet door wasn’t fully shut, then He could get out. You had never seen Him, but you had heard of Him, maybe even read about Him, and you could certainly feel the dread that He projected, like a sonic ray, straight from his lair in the dark closet to your childhood bed. Your young mind quivered with the threat of an attack that could come at any moment. The Boogeyman felt very real to you!
Maybe today you have children of your own, and you have seen how the slightest provocation can push a child’s fertile imagination into overdrive. A shadow that falls the wrong way, a doll that seems a bit off, a closet door that isn’t closed quite right. With such powerful young minds, it’s easy for children to distort the flimsiest pieces of evidence into a threat that feels very real to them.
Today’s healthcare investors are much the same way! Despite never ending demand for the products of the American Healthcare Industry, stock performance has lagged, mostly due to fears of changes that could be wrought be threatening politicians.
As CNN Business declares, “Glum Days Have Arrived for Healthcare Stocks.”
The stock market is having a banner year, despite the trade war with China and worries about a looming economic slowdown. But health care stocks aren’t taking part in the rally:
Continued worries about the possible unwinding of the Affordable Care Act — aka Obamacare — and renewed calls from the Trump administration and leading Democrats to push prescription drug prices lower are clouding the earnings outlook for many health care companies.
If Senator Elizabeth Warren continues to gain ground in the polls for the 2020 Democratic presidential nomination, that could add pressure to the group. Warren supports the Medicare For All single-payer plan backed by her rival, Senator Bernie Sanders. (CNN Business, 10/11/19, Paul L. La Monica.)
The Wall Street Journal explains that these political fears have weighed on performance of the Health Sector relative to other members of the Dow…
The S&P 500 Health Care Sector index has returned about 4% so far this year. That is the second-worst performing sector over that period and significantly lags behind the overall market. (WSJ, 10/13/19, Charley Grant)
Does this mean that it’s time to trim your exposure to healthcare, out of fear that ranting politicians will make good on their threats? Before we decide that the Boogeyman is out to get us, let’s look at the evidence and weigh the risks. Then let’s rationally compare those risks to potential rewards and see if it makes sense to “stay the course,” or whether it’s time to dump our stocks and go crying to Mommy….
Let’s face it; there is much left to be desired with today’s healthcare system. The system’s inadequacies are felt by average Americans across the political and financial spectrum, because millions of people every day need some kind of medical care, and no one is happy with run away costs and management tactics that can often seem mafia like. Therefore, it has become popular to bash healthcare companies, in general. Part of what has fueled underperformance in healthcare stocks of late is the feeling that Big Healthcare (Big Pharma, Major Insurers, Hospitals) have few friends left on either side of the political aisle. This is sort of like deciding that if you find that there is no Boogeyman lurking in your closet, that is just because he is hiding under your bed instead…
That being said, the three front running candidates to be the next President of the United States vary greatly in their desire and ability to effect the kind of radical change that could harm your stock portfolio. Let’s evaluate the three most likely scenarios.
Scenario #1: More of The Donald
Astoundingly, most political pundits still believe that Trump has a decent shot at re-election. What he doesn’t have a decent shot at is a normalized working relationship with the United States Congress. And radical change is very hard in our three branch system if one branch can’t get along with the other branches. In fact, by the United States Constitution, all major legislation MUST originate in the House of Representatives. The very same House of Representatives that is currently spending most waking hours attempting to impeach Donald Trump. So, on a simple rational level, is it likely that the Trump/Congress death match will ever result in the kind of productive working relationship that would be necessary to effect major change in our healthcare system? Sure, just after pigs fly…
The only thing more mysterious than the origin of Trump’s hair is his attitude towards Big Business. Sometimes he fiercely defends Corporate America (he championed widespread tax cuts for big corporations). Other days he attempts to shame Corporate America into a basic sense of decency (he signed an Executive Order forcing Big Pharma to include medication list prices in televised ads). So, if Trump were King of America, rather than a mere President, who knows what healthcare shareholders might have to endure. But he is not. He is merely one branch of three branches of government. And unless his relationship with Congress miraculously improves, no major changes will occur through the American Political Process….
During most of the early goings of the Democratic nomination process, former Vice President Joe Biden has been considered to be the front runner. In fact, Biden has been seen as the “most electable” due to his penchant for moderate Progressivism.
A President Biden would be much more likely to have the capacity to push through radical change. He had a long and storied career as a Senator; Joe Biden knows how Congress works. His vast experience and moderate temperament would make him the most likely candidate to effectively unite all three branches of government to make big changes. But, for a number of reasons, he is the least likely to want big changes.
First of all, it’s hard to call someone’s baby ugly. If Obama was the father of Obamacare, then Vice President Joe Biden was the OBGYN who helped deliver the fledgeling healthcare program into the world. This is the same man who, accidentally caught on a hot microphone, was overhead exclaiming to Obama….”This is BIG f*cking deal!” Biden worked very hard to create Obamacare, and he is unlikely to want it totally replaced by a more radical approach. He is more likely to advocate for incremental improvements to the Obamacare structure, because he built it to begin with.
How much should this bother you as a shareholder? The rational answer should be: not much. If you hold shares in a major provider of healthcare services, whether it be Big Pharma, Big Insurance, or Other, you very likely employ a team of executives who are highly skilled at mastering systems. If they have clawed their way up the corporate ladder, they are likely very good at manipulating bureaucratic situations to their benefit. We have seen that major American corporations simply evolved along with Obamacare, and have learned to profit from it. Expect more of the same with a Biden Administration.
Scenario #3: Who is afraid of the Big Bad Warren?
Bursting on the scene is the Progressive firebrand Senator Elizabeth Warren. She seeks to “remake Capitalism” to create a “system that works for everybody.” These are the kinds of radical pledges that make trembling corporate shareholders wet their beds.
Senator Warren certainly has the will to drive radical change that could be harmful to your portfolio of healthcare stocks. As a Senator and former Ivy League professor, she should be able to build working relationships that would help move her big changes through our system. But she would still have to face the fact that our United States Constitution was not built for radical social revolution. Getting big changes through all three branches of government is very, very hard.
Before we go over the specific proposals that give corporate boards nightmares, let’s review exactly what would need to happen for the US Government to enact game changing, “once in a generation” legislation.
Once again, all legislation begins in the House of Representatives. So, a President Warren could certainly convince, cajole, and connive to push her agenda forward, but unless she also has a Democratic Congress, nothing big can happen. Then, once a bill is proposed by the House, it must also be voted on by the Senate. So, if Warren has a Democratic Congress, but a Republican Senate, most of her socialistic dreams will die in the crib. We currently have a Democratic House and a Republican Senate. Does it feel like anything big is being accomplished to you?
If there is one thing that we learned from the Odyssey that has been Obamacare, it’s that single party control of both Congress and the Whitehouse may STILL not be enough to make big changes stick. Any radical legislation will face dozens, if not hundreds, of challenges in court. A radical Warren agenda, even if fully passed, would face a blizzard of injunctions, hearings, and rulings. Just like Obamacare, it might survive in full, just partially, or not at all. Risky business.
The most likely outcome would be watered down, compromise legislation, because that is the outcome that is most encouraged by our Constitution. In short, it’s much easier for a Senator Warren to make aggressive promises than it will be for a President Warren to keep those same exact promises. Consider carefully before you decide to sell your pharmaceutical stocks…
The “Worst Case Scenario”
When analyzing risk and reward, it’s often helpful to focus on the “worst case” scenario, and decide just how bad that scenario might be. If you are heavily invested in the status quo, and you are depending on vibrant capitalism for your retirement, the “worst case” would probably be a President Elizabeth Warren who somehow enjoys a democratic Congress and Senate. (I say somehow, because it is rare for all branches of government to be controlled by the same party. Not impossible, but rare.) Let’s break down some of the most progressive proposals and see how likely each one is.
1. MEDICARE FOR ALL
Warren has fiercely championed the idea that private insurance in general is unnecessary and that all private insurance should be scrapped in favor of a direct government run system, like Britain’s National Health Service.
This certainly is a radical proposal, and it certainly has hurt share performance of companies like United Health. But, when push comes to shove, is it anything more than a Progressive pipe dream?
The case of Vermont is instructional. You can’t find a state more associated with Progressive ideals than Vermont. In fact, the state is home to the Democratic party’s other “Medicare for All” firebrand, Bernie Sanders. And yet, Vermont failed to pass universal healthcare when the chance was right before them. The Washington Post’s Amy Goldstein explains:
The trajectory of Green Mountain Care, as Vermont’s health system was to be known — from the euphoric spring of 2011 to its crash landing in late 2014 — offers sobering lessons for the current crop of Democrats running for president, including Vermont’s own Sen. Bernie Sanders (I), most of whom embrace Medicare-for-all or other aspirations for universal insurance coverage.
Vermont’s foray into publicly financed health care — in a state that in many ways offered the optimal conditions — demonstrates the extraordinary difficulty of trying to convert liberals’ dream of a more just, efficient health system into reality. (WaPo, 4/29/19. Amy Goldstein)
In the most tax friendly state in America, the Powers that Were just couldn’t find a way to pay for it without taxing middle class citizens to a nauseating level. Warren is notorious for aggressively promoting proposals to make America’s Ultra Wealthy pay “their fair share.” Vermont has plenty of wealthy citizens, and little to none of the urban poverty that larger states struggle with. And yet, the math still didn’t work. That is why every single Developed Nation that offers universal healthcare also has very high levels of middle class taxation. Taxing the rich may create a feeling of “social justice,” but the math just won’t work. If it didn’t work in Vermont, it certainly won’t work for the United States as a whole.
2. GREATER WORKER PROTECTION/GREATER WORKER REPRESENTATION
A President Warren is likely to champion corporate “stakeholders” rather than merely maximization of shareholder value. This can mean a lot of onerous regulations for companies that are perceived as bad actors; the resulting bureaucracy is thought to be a drag on corporate profits.
Three policies that she has specifically championed are a higher minimum wage, more paid parental leave time, and worker representation on corporate boards. A lot of these proposals, if they were to become law, might actually benefit you as a Big Pharma shareholder, because Big Pharma would be least burdened by the effects. For example, if onerous increases to the minimum wage were forced down the throat of Corporate America, investors who need a good yield might pass up McDonald’s in favor of Pfizer. McDonald’s could be very adversely affected by minimum wage laws; Pfizer just doesn’t employ many low wage people.
Likewise, if large, public corporations were required by law to devote a certain number of board seats to rank and file employees, the Mercks of the world would likely face less conflict and cultural friction than say, General Motors. Most major healthcare companies have the deep pockets and spare cash flow to weather these kinds of shifts in stakeholder norms.
3. NO MORE “MR. NICE GUY” FOR MEDICARE
Did you know that, currently, it is illegal for Medicare to demand lower prices from pharmaceutical companies? What kind of buyer doesn’t actively try to negotiate the best deal possible?
The answer is: a buyer that wants to incentivize pharmaceutical companies to keep taking risks, enormous risks that can only be justified if the resulting goods will be sold at a high price. Believe it or not, Uncle Sam currently pays high prices on purpose.
From the point of view of a pharmaceutical shareholder, candidate Warren’s single most dangerous proposal is to change Medicare’s mandate, so that it goes from being forbidden from negotiating drug prices to required to negotiate drug prices.
As you can imagine, Medicare would be one tremendous negotiator. Afterall, most medicines are disproportionately sold to senior citizens; any pharmaceutical company cut off from access to America’s Senior citizens has just lost the most wealthy group of active patients on the planet. The savings would be massive, because it would effectively be a one sided negotiation; Medicare could set almost any price it wants. Where else would Big Pharma sell the medications?
This is perhaps the most real threat, because it would be a simple change. No massive new social program would need to be constructed, Medicare would not need to hire thousands of new employees. A few simple strokes of the pen, and pharmaceutical prices would plummet in the USA, likely transmitting pain directly to you, the shareholder. This is like fearing an imaginary boogeyman in your closet, and instead finding a very real burglar crawling in your window.
RISK VRS. REWARD
So, in summary, the biggest single risk that Healthcare Shareholders face this political season is a President Warren who realizes that price controls are a lot easier to implement than entire new governmental programs for three hundred million Americans. She would need to get elected (currently 33.3% chance) and then she would need to have both the Congress and the Senate held by democrats (a vanishingly tiny chance). But it could happen.
Now let’s go over the upside in this equation. No matter who becomes president in 2020, they are going to have to contend with 10,000 Baby Boomers per day who turn 65; many of whom will need constant medical attention through their mid to late 80’s. That means exponentially more demand for pharmaceutical and medical innovation.
The new administration will witness continued research discoveries in cancer, chronic diseases and infectious diseases….scientific breakthroughs that the Media will cover, and the public will demand, price be damned. In a world where commoditized goods and services see prices drop steadily, American patent holders will still have the exclusive right to benefit from their innovations for prolonged periods of time.
In short, demand for new and better medicine will only grow, and supply will always be limited. Doesn’t that seem like a risk/reward ratio that remains favorable, even if you have to ward off the Boogeyman during some of Capitalism’s darker nights?
Perhaps it’s time to think of Mr. Market’s irrational fears as what they really are in the cold light of day; a buying opportunity.