Healthcare policy has been at the top of investors’ minds since the U.S. elections that took place in November 2016,. The uncertainty around healthcare reform has created meaningful opportunities for returns for clients in actively-managed strategies. Dutch asset manager NN Investment Partners (NN IP) talks about what happened, and how active managers can help clients benefit.
Passage of new healthcare legislation seemed like a forgone conclusion following the Republican electoral sweep. However, the new administration suffered its first major setback when the U.S. Congressional house of representatives pulled the American health care act bill (AHCA) on the 24th of March.
The AHCA was the proposed legislation for the repeal and replace of the Affordable Care Act (ACA), more commonly known as “ObamaCare.” ObamaCare was signed into law in 2010 and expanded access and rights to healthcare for millions of Americans. House speaker Paul Ryan (Republican-Wisconsin) informed President Trump that he was withdrawing the AHCA bill, as it did not appear likely that it would garner enough votes necessary to pass in the House. This decision comes as a big blow for the Trump Administration and Republican Party, as the repeal of ObamaCare had been a key message during the 2016 presidential campaign and one of the Party’s primary objectives since the law’s passage in 2010.
However, Republican efforts to push through the AHCA passage prior to the April Congressional recess proved quite aggressive for a complicated bill that was estimated to result in the loss of healthcare coverage for 14m Americans by 2018 and 24m by 2024, as well as disadvantage many lower income Americans and those in the 50 and older age bracket. Once it became clear that the bill was going to fail, President Trump and Speaker Ryan quickly shifted attention to the next item on their agenda, Tax Reform.
J.D. Rieber, head of the US high yield credit analyst team at NN Investment Partners commented, “many of the companies within the healthcare industry have benefitted from the expansion of patient coverage provided through ObamaCare, so the withdrawal of the AHCA “repeal and replace” legislation is a positive for the sector. Hospitals, emergency rooms and other providers tied to Medicaid expansion benefit the most by the AHCA legislation not passing. Much of this increase in the insured patient base came as a result of Medicaid Expansion through ObamaCare. So far, 31 states plus Washington, D.C., have elected to expand medicaid with federal funding provided by the ObamaCare legislation. In addition to seeing increasing volumes through this expansion of coverage, these providers also benefitted by experiencing declines in uncompensated care write-offs related to uninsured patients. These uninsured patients tend to defer care until they have little choice but to seek medical attention, often resulting in sicker patients utilizing the emergency department of a hospital as their primary source of care and incurring much higher charges that they’re often not able to pay. The hospitals, unable to collect, were forced to write off these charges.”
We expect healthcare policy to be revisited in the future, albeit through less transformational legislation. This could include smaller, less comprehensive healthcare provisions and administrative action on behalf of the Department of Health and Human Services. Both sides may also come back together to discuss potential relief for the insurance exchanges and the reauthorization of the State Children’s Health Insurance Program (SCHIP).
Sebastiaan Reinders, lead portfolio manager, US high yield and senior portfolio manager, global high yield at NN Investment Partners said, “the uncertainty leading into last week’s healthcare policy discussions had created opportunities for active investors. With the failure of the passage of the AHCA, we’d expect this uncertainty surrounding healthcare to decline. As fundamentally-driven investors, we will continue to be very selective in the healthcare space, focused on investment cases that are driven by company fundamentals. In our clients’ portfolios we own a mix of companies throughout the healthcare spectrum, with an eye toward companies with specific catalysts to provide outperformance. Aided by our bottom -up driven research process, we build conviction on these catalysts and utilize scenario analysis to evaluate potential outcomes. With the overhang of major healthcare legislation behind us, we can capitalize on the volatility created by the Republican’s next contentious issue, tax reform.”