Market Memo: An upside to the Affordable Care Act

02-13-2014

This week’s news that the number of people signing up for private health-care insurance in January exceeded projections, pushing the overall total to 3.3 million, illustrates a key attribute of the Affordable Care Act (ACA) that tends to get overlooked in the “love it-hate it” debate. Whether you are a fan or a foe of the ACA, we can all at least agree that on a fundamental level, the act and its related mandates are driving more and more people into the nation’s health-care system. And as the previously uninsured become insured, demand for and utilization of health-care products and services will only grow.

This is creating a myriad of opportunities—and risks. Many areas already seeing and sure to see more use, most notably hospitals, insurers and doctors, also can expect to see price controls and other cuts in an effort to rein in the additional costs associated with the surge in demand. Indeed, the act contains several cost-containment provisions precisely aimed at addressing these demand-driven pressures, such as limits on how much insurance companies can charge for administration and profits, state review of rates proposed by insurers and future reductions in the rate of increase for Medicare reimbursements.

Other parts of the health-care sector, however, should benefit from this rising volume without having to worry about prices being ratcheted back or the government stepping in to cull their profits. One example is a California medical technology company with quarterly sales of nearly $1 billion that generates about half its business from the sale of infusion and dispensing equipment to hospital intensive-care units, including a new delivery system that integrates with the existing hospital information technology network, which should help reduce hospital medical errors and thus costs. Demand for its products should continue to grow as the ACA drives more people to seek health coverage and ultimately hospital care.

This is just one example of how the ACA stands to benefit a broad range of companies. Hospitals, insurers and doctors may find their lives complicated by new and ever-changing regulations and pricing mechanisms under the act. But what is one group’s misery very well may be another’s delight. This is the part of the ACA story that investors would do well to focus on, even as they debate the pluses and minuses of increased government involvement in health care.


 
 
 
 
 
 
 
 
 
 
 
Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Federated Global Investment Management Corp.
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Copyright © 2014 Federated Investors, Inc.

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