'Medicare-for-All' uncertainty creates opportunity 'Medicare-for-All' uncertainty creates opportunity http://www.federatedinvestors.com/static/images/fed-logo-amp.png April 2 2019

'Medicare-for-All' uncertainty creates opportunity

Single-payer buzz is hurting managed-care stocks. That's good for value investors.
Published April 2 2019
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As the 2020 presidential election season continues to unfold, the push by some Democratic hopefuls for "Medicare for All" is stoking uncertainty in the health-care sector. Indeed, with some predicting these vague initiatives could lead to the end of private health insurance and the managed-care industry as we know it, many health-care service companies have experienced significant declines in their stock prices so far this year.

We believe this is a classic overreaction. Lost in the headlines is the fact consensus support for Medicare for All is lacking among moderate Democratic leaders. While some left-leaning candidates have backed the idea in some form, many in the party—including presumed front-runner Joe Biden if he chooses to run—have not. As the endless back-and-forth over the Affordable Care Act has shown, significant progress toward any kind of single-payer system won’t happen overnight. Even if the Democrats were to regain political power in 2020 and unite behind the idea, the legislative reality of such sweeping reform would only allow for incremental change, and in that scenario managed care could end up being part of the solution.

Moreover, the managed-care industry has some of the strongest fundamentals in the health-care sector and has exhibited consistent positive earnings momentum. Managed-care providers have rapidly consolidated market share in recent years while diversifying into non-insurance business lines, thereby gaining greater control of the continuum of care delivery. To put things in perspective, the top five managed-care providers retain almost half of the insured population in their medical membership. The cost of replicating their system’s infrastructure would be colossal, ensuring that these businesses are not going away anytime soon, with or without major health reform.  

As value managers, we welcome all the uncertainty the Medicare-for-All buzz is fomenting as it is creating an opportunity to buy quality domestic companies with above-market growth at discounted prices. From our perspective, an increasingly efficient and diversified managed-care industry should prove resilient regardless of the current flirtation with the ideals of a Medicare-for-All system where the devil—and costs—are in the details. Ben Graham, the father of value investing, said it best: “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”

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DISCLOSURES

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.

Value stocks tend to have higher dividends and thus have a higher income-related component in their total return than growth stocks. Value stocks also may lag growth stocks in performance at times, particularly in late stages of a market advance.

Federated Global Investment Management Corp.

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