Continuing on with a two-part series on what defensive strategies to take in dealing with the new or modified reality of Obamacare. Part 1 can be found here.
Definition of political entrepreneurship, by author Thomas DiLorenzo as quoted on Wikipedia:
“a political entrepreneur succeeds primarily by influencing government to subsidize his business or industry, or to enact legislation or regulation that harms his competitors.” He says, in contrast, the “market entrepreneur succeeds financially by selling a newer, better, or less expensive product on the free market without any government subsidies, direct or indirect.”
In the context of political entrepreneurship, or entrepreneurship alone, it’s just about the money. For political entrepreneurship to bear fruit, provisions, clauses and codicils must be ram-jammed into legislation such that it’s somewhat easier for honest, hard-working corporate giants to just scrape by, barely keeping body and soul together.
With Obamacare, the simple question is, to whom will the profits of this thousand-page document accrue. Cui bono, to use the classic Latin phrase, who benefits? Rhetorical question, really, we already know the answer.
Googling will get you in trouble and not a little off track. A simple query like “who wrote the Patient Protection and Affordable Care Act“, turns on the proverbial fire hose of information overload.
After sifting through the bias, through the politically partisan dreck and noise, the same few names keep popping up:
Elizabeth Fowler. Liz was Chief Health Adviser for Senator Max Baucus (D-MT) and former Vice President for Public Policy and External Affairs at Wellpoint, Inc (NYSE: WLP) (WellPoint is the third largest consumer health insurer by market capitalization, behind UnitedHealth and AFLAC)
Michelle Easton: former Health Adviser to Senator Max Baucus, currently employed with lobbying firm Tarplin, Downs and Young. Tarplin Downs and Young are currently representing WellPoint.
Stephen Northrup: former Health Policy Adviser for Senator Mike Enzi, former Vice President for Federal Affairs at Wellpoint (man, there they are again…), former executive director of Long Term Pharmacy Alliance, now a “Principal at the Podesta Group”, an equal-opportunity lobbying firm founded by none other than John Podesta, Bill Clinton’s former Chief of Staff.
It’s all very cozy, in a Washington revolving-door kinda way.
By the way, the above-mentioned senior senator from Montana, Max Baucus, is himself a typical political-elite piece of work: lawyer and senator-for-life, shamed into giving back political contributions received from Jack Abramoff (and who wasn’t, really?), recommended his dubiously-qualified live-in girlfriend Melodee-with-two-E’s for Montana’s vacant U.S. Attorney post, and beneficiary of vast sums of campaign contribution money from the healthcare industry. You know, the usual.
It is said that the healthcare industry has five or six lobbyists for every member of congress. Now that’s personalized service! Are you through urinating, Sir, may I zip up your fly?
So why all this effort by WellPoint, a leading national insurer to at the very minimum, insert inconsequential bits and pieces into the PeePACA?
(This is turning into a bloody long post, but stick with me)
Let’s follow the money, or lack of it. Health Insurance seems to be a low-margin business, says the data.
Top 10 managed-care insurers:
The screen shot is from Google Finance, Financial sector, sub-category Insurance, sub-sub-category Accident and Health, sorted by size, or Market Capitalization.
Dumping this data into a spreadsheet and tallying up the columns gives these totals and averages:
Aggregate Market Capitalization: $161 Billion
Average Price to Earnings, TTM: 10.77
Annual Revenue: $319 Billion
Annual Net Income: $16.4 Billion, or 5.14%
We could say that WellPoint (4.36% net), Humana (3.85%) and CIGNA (6.03%) are not doing too terribly well, at least on paper. Let us contrast this to the other major players in the healthcare space, Big Pharma and Medical Equipment Makers:
The likes of Bristol Myers, Abbott and Merck do pretty well as a group:
Aggregate Market Capitalization: $953 Billion
Average Price to Earnings, TTM: 19.14
Annual Revenue: $312 Billion
Annual Net Income: $55.5 Billion, or 17.80%
Same yearly revenue as the top insurers, but almost six times the market cap, and more than triple the profits. Almost 18 percent net, well done, Pharma!
And lastly, medical equipment manufacturers, the folks who bring you the wonders of colonoscopy scanners and Da Vinci Surgical Systems. Here’s their own TOP 10 list:
Aggregate Market Capitalization: $214 Billion
Average Price to Earnings, TTM: 17.51
Annual Revenue: $82.77 Billion
Annual Net Income: $13.4 Billion, or 16.2%
What performers… sales of only $83 billion or so, but making as much in total profit as the top ten insurers.
And This All Means… What?
It’s clear that the insurance business doesn’t pay as well as pharmaceuticals or making x-ray machines. Equally clear that health insurance companies are taking steps so that field is leveled, engaging in a little political entrepreneuship, as it were.
Crystal clear that medical equipment makers are rank dilettantes at
bribing politicians making lavish campaign donations navigating the muddy waters of the Washingon DC lobby swamp. Would Medtronic and Baxter International been a little more politically nimble, we might have seen the federal government require that every American household be equipped with de-fibrillators and blood-sugar monitoring machines — for our own well-being, you understand.
Instead, we’re merely required (by law) to purchase medical insurance, and equipment makers are the ones getting tagged with a “2.3% excise tax on manufacturers and importers of certain medical devices“.
But that’s OK, corporations don’t pay taxes, they just pass them on as the cost of doing business. Will hospitals and clinics care that the cost for that state-of-the-at Da Vinci Surgical System (**) (now with racing stripes) just went up 2.3%. Somehow, I don’t think so. Perhaps physician-owned hospitals might bemoan the rising cost of equipment, but doctors like their toys too. They’ll find a way to afford them and pass the buck.
In part 1 of this post, there was a bit of tongue-in-cheek fun poked at fat people, and how to profit from this nation’s increasingly evident ill health and sick-care (***). That health care companies are going to do well by these trends is almost a given. Insurance companies will do slightly better, and Pharma is going to continue making money hand over fist.
I’m personally not keen to invest in this sector, right at this time. I don’t know it well enough, but just reading up on the background for this part 2 has given me a bit of a headache. There are a number of Exchange Traded Funds available for industry, with Vanguard’s Health Care ETF (VHT) is probably as good a choice as any. Basement-level fees (0.19%), a modest yearly dividend of 1.44%, low beta of 0.70 and holdings that feature most of the big names (Amgen, Brystol-Myers, etc.).
On the individual equity side, TEVA Pharmaceuticals has caught my eye, but I’m not ready to pull the trigger on this one. Need to do so more reading up.
What this all really means, though, is….
All Government, All The Time
That’s right. More taxes and regulations, more government.
US Government spending *will* increase.
The Congressional Budget Office predicts that US health-care spending will increase from 17% of the economy to 25% by 2037 (assuming we can finance the yearly budget deficit until then). Government spending means more bureaucrats and administrators, which means more desks, which means more offices in and around the beltway and across the country.
Obamacare Coping Strategy #3, be the Federal Government’s landlord. Specifically, an office-space provider. And happily enough, there’s a REIT that’s got us covered.
Government Properties Income Trust (GOV) is a real estate investment trust (REIT). As of December 31, 2011, GOV owned 71 properties located in 29 states and the District of Columbia containing approximately 9.0 million rentable square feet, of which 68.2% was leased to the United States Government, 17.5% was leased to eight state governments, and 2.1% was leased to the United Nations, an international intergovernmental organization. As of December 31, 2011, the United States Government, eight state governments and the United Nations combined were responsible for 91.9% of the Company’s annualized rental income
Upside: unlimited in the medium term, much like the Fed’s money supply.
Downside: GOV’s management and trustees decide to blow it all on pricey hookers and repeated trips to Vegas. Unlikely.
This is a relatively new REIT, only active since 2009 and investment grade since 2010. There is that. But GOV is profitable, and kicks out a 7.70% yearly dividend. Good enough for me.
Delving into the smelly particulars on the origin of this bill was done partly out of personal curiosity, and partly to illustrate how far removed we individual citizens are from the government at federal level and even state level.
The likes of WellPoint and Humana might have former staffers inserted into powerful Congressional committees. Edna and Joe Lifschitz from Goobertown, Arizona aren’t so privileged.
Liz Fowler might have graduated from an Ivy League University (University of Pennsylvania, in fact), while Joe Muckenfuss and his kids have to make do with the community college in Muck City, Alabama.
Senator Max Baucus has the stones to try and finagle a plum government job for his live-in squeeze, while Burt Snidely’s small building/contracting company in Roachtown, Illinois, might fail because of Obamacare non-compliance.
All we peons can do is stay healthier, eat healthier, and make sure those we know and love stay as healthy as they can, and out of the clutches of the a system that’s becoming increasingly more complex and baffling.
And as landlords, make sure the Government gets that rent check in on time, dammit.
That’s it for this series, whew! Thank you for reading.
Posting is incontinently irregular here at 101C, but subscribing is a great way for the smart money to stay current. A quick click on the RSS feed, or the Twitter will do the trick. Or Email, that works a treat as well.
Obligatory disclaimer: not long any of the securities or funds mentioned above. I have a limit order in for a few shares of GOV. The preceding is presented for entertainment and education purposes, go out and make your own future regrets…
(*) a vaguely Orwellian title, but so is most major industry-sponsored legislation — it’s all in the marketing.
(**) Intuitive Surgical (ISRG), the maker of the Da Vinci, makes some crazy money. Over 30% net margin the last few years, with a high P/E to match.
(***) Lots of reasons why health care should really be called “sick care”, why North Americans are so expansive in the middle regions, why Europeans are svelte and stylish, while Yanks shuffle around in expando-fabric shorts and crocs.
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