Affordable Care Act is Here to Stay
With the Supreme Court ruling the individual mandate in the Affordable Care Act as constitutional, it is time to start looking at how this law can affect your investments. Some of the effects are direct while some others are indirect.
1. Some companies and their stocks benefit
A greater pool of insured guarantees a greater number of people seeking medical attention. Obvious beneficiaries are the hospital stocks and the drug manufacturers. Other beneficiaries include medical device makers and companies like Stryker (SYK) that make hospital beds and other equipment and Baxter International (BAX).
How about the stocks of the health insurance companies?
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While the number of people paying premiums will increase, benefits payouts will increase as well due to lowering of the quality of insurance pool and the caps on the premiums. Over time the insurance industry will adapt. I expect the sector to be weak for a few years and eventually pick up.
2. Rest of the market is a mixed bag
The cost to do business in America is going up, while the productivity of the existing workforce will likely increase due to more universal coverage and healthier workforce. This of course means additional drag to the job growth and economic recovery. Bulk of the cost increases will be passed on to the consumers, one way or the other, so eventually the profits will recover. A good deal also depends on the relative health of China and Europe and whether the shift of manufacturing back to the US is sustained.
Personally, I believe that the businesses will find ways to evade or minimize these cost increases while the consumers will bear most of the burden.
3. Return of the inflation and accelerated breakdown of the Social Security and Medicare
Lower job growth, higher prices, means inflation will surely rear its head. Perhaps sooner rather than later. Assets such as stocks and real estate will rise and hopefully this will create real wealth for the society. Poor and less well off will see their expenses rise greater than their wealth so we are looking at an increasing divide between rich and poor. Ironically, if the law does succeed in improving general health levels (which I support), it will cause greater stress on the Social Security and Medicaid programs due to increased life expectancy, especially if the job growth is negatively affected (less contributions).
Of course, there will be challenges and back room deals and eventually what emerges may be different, given this is an election year. What concerns me most is that the law might end up with unintended consequences where healthier population ends up subsidizing benefits for those who couldn’t care less about living a healthy lifestyle. The mismatch between the risks and benefits eventually hurts the society at large by adding costs to the society which acts as a tax.
What kind of investments do well in an inflationary environment? Stocks in the companies with real tangible assets and real estate. During inflation, you want to be borrowing money and not lending it so bonds are not a good investment (especially when the yields are low and prices are high like now).
Bottomline for investors: Buy stocks, real estate and other tangible assets. Prepare for inflation. Avoid health insurance stocks. Prepare for a longer and perhaps delayed retirement.
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