The stock market initially misinterprets ObamaCare
by Rossputin | 5:21 am, March 23, 2010 | Comments Off
More has been made than usual of one fairly dull day’s activity in the stock market following yesterday’s modest gains on the first trading day after what most Americans rightly perceive as an assault on our health care system.
The Associated Press noted that “Health care companies pull stock market higher“.
Although I also expected a more negative reaction (and the market did indeed open fairly sharply down before recovering), in hindsight the move makes sense for two reasons…but I also think that in the medium term the market may realize it made a mistake.
First, and commonly understood, is that the market generally likes getting rid of uncertainty. So, some would argue that simply having the majority of the politics overwith now allows the market to move on to other things.
Second, and less commonly understood, is that it is quite possible that the structure of whatever comes from ObamaCare will be beneficial for many medical companies – with at least a one-for-one loss to consumers. By that I mean that the bill will force tens of millions of previously unable or more frequently unwilling customers into the arms of health insurers. Those people may see doctors more frequently and those doctors will prescribe pills. The whole plan will also likely increase barriers to entry and reduce competition among insurers as it essentially turns the industry into a regulated monopoly. The market must think that this means the companies are guaranteed profits, even if at a modest long-term growth rate.
A not dissimilar comparison could be with the Tobacco Master Settlement in 1998. It was positioned by politicians as punishment but it really just created a regulated monopoly for the largest tobacco companies. It hurt their growth rate a little bit – not as much as trends throughout much of the world against smoking) but basically protected them from everything else. The market is looking at this sort of history and thinking that ObamaCare will mean a similar outcome for health insurers.
But the market is wrong.
Politicians of all stripes have a very strong interest in gaining the tax income from cigarettes. In a sense, many US governments are addicted to smoking. It’s not as if the government is likely to put Big Tobacco out of business so Uncle Sam can start selling cigarettes and stogies.
Health insurance is something else entirely. It is beyond debate that the true desire of the left wing of the Democratic Party, which is to say all of its current leadership, has a deep desire to end the private health insurance industry, not just tame it.
In that sense, ObamaCare’s passage increases long-term uncertainty exactly the opposite of the way the government created relative certainty for tobacco companies.
ObamaCare as passed is the camel’s nose under the tent, with the next step being a renewed push for a “public option”, code for “a government-run health insurance plan so heavily subsidized that no private company can compete with it.”
The long-run prognosis for private health insurers is bleak indeed if ObamaCare is not overturned.
And lest the pharmaceutical industry think they’re insulated from that sort of damage, remember that once government controls the health insurance industry, the only way they’ll be able to control costs (since they cannot do anything efficiently and will never cut salaries of government workers – all of whom will be unionized, I might add) is by rationing care, in particular by moving toward reliance on the least expensive drugs and generic versions of drugs.
There are a lot more shoes to drop over coming months and years. It remains to be seen whether forces of capitalism and liberty can overturn ObamaCare. Overturning an enormous new entitlement program has never been done before, but this is also an utterly new set of circumstances.
At the end of the day, strong stock prices for health insurers, hospitals, and pharmaceutical companies will only be sustainable if ObamaCare is replaced by free market competition. So, if the politics don’t change, these companies’ values certainly will – and not for the better.
All that said, a lot of people have lost a lot of money being too early on market calls of all types. Trying to play this sort of long-term macro event is generally not best attempted by the individual investor except to the extent that if I owned these stocks I’d consider taking profits.
(My caveat as always: Your trades are your responsibility…I’m just thinking out loud.)
