WEALTH - A Prescription for Profits

Dynamic healthcare issues create new and niche investment opportunities

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As the country heads full speed toward a national election, more people (politicians and the general public) talk about healthcare on the podium, in the press, and at the dinner table. But the dynamics of rising medical costs, expiring drug patents, and health insurance play into investment strategies as much as they play into political debates.

Jeff Jonas, a research analyst who manages the Gabelli Healthcare & Wellness Trust, is counting on politics to dictate where to invest in healthcare.

“The Democrats are your friend, so look for plays that save money for Medicare,” he says. He points to publicly traded hospice companies delivering end-of-life care as a growing business. Medicare now covers hospice care, and Jonas is betting that coverage will continue despite Republican demands to slash Medicare reimbursement. But, as always, a growing trend doesn’t necessarily guarantee profitable returns.

Medicare is looking at significant cost savings as several pharmaceutical patents for major drugs, including Lipitor and Plavix, expire. “Companies manufacturing generics are looking at earnings growth of 15 to 25 percent,” Jonas says.   

When the healthcare reform debate moves to the Supreme Court next month, investment opportunities could crystallize. The high court will rule on whether the Patient Protection and Affordable Care Act is unconstitutional. The law mandates that more than 30 million uninsured Americans buy health insurance coverage beginning in 2014. Can the government force people to buy health insurance?

“This battle is creating a healthcare sector ripe with a great amount of opportunity,” notes Joshua Schachter, principal and portfolio manager of Snow Capital Management in Sewickley, Pa. With $3.5 billion in assets under management, Snow is watching the issue carefully and investing. “We are buying companies in the industry that are trading at a fraction of book value with low price-to-earnings yields yet have healthy cash flows,” says Schachter, pointing to companies that deliver basic services to an aging population, including nursing homes, long-term care, home healthcare, and end-of-life care providers. “We take a long-term position and like a basket of healthcare stocks properly positioned that will do well no matter which way the Supreme Court rules.”

Steve Jacob, a journalist who spent four decades covering health policy for Texas newspapers and magazines and author of Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors, and Skyrocketing Costs Are Taking Us (Dorsam Publishing, 2012) notes that by 2020 the average family of four will spend 17 percent of their total income on out-of-pocket healthcare expenses. In late 2011, he attended a conference in Dallas focusing on venture capital opportunities in healthcare. “These VC guys were bullish on healthcare, seeing the future as if it doesn’t get any better than this for investment,” Jacob says.

He points to the retail healthcare model for significant growth opportu-nities with public companies. Less costly, nontraditional healthcare delivery settings — such as CVS pharmacy’s MinuteClinic, where no appointments are necessary for diagnosis and treatment by a nurse practioner or physician’s assistant for common illnesses, minor injuries, and skin conditions — are growing rapidly. A visit costs less than seeing a physician; access is easier; and MinuteClinic accepts most insurance plans, as well as cash, check, or credit card. “This mode of care is becoming increasingly popular, especially with younger people as their go-to for healthcare,” Jacob says, adding that Walmart has been considering offering management and monitoring of chronic conditions such as diabetes, asthma, and HIV infection, as well as diagnostic services like allergy, PSA, and pregnancy testing.

Another healthcare investment opportunity is privately funding a small start-up. Steven Lawrence, founder and managing director of New York-based Strategies Think, runs an advanced medical procedure training center and a surgical medical device financing company. “The rate of change in the healthcare industry is so fast it presents investors with opportunities to bring new niche competencies into play, like advanced education for the growing move physicians are making toward specialization,” he says.

Lawrence also considers small companies that supply financial and risk services for medical procedures that are new and still in a state of flux with regard to standardization and reimbursement, such as spinal cord stimulator implants. “For investors that are interested in paradigm changes, this is the place to be,” he says.

If one fundamental is certain, changes in healthcare delivery and cost contain-ment will continue with inherent risks and potential rewards for investors who can wait for healthy returns.