If there’s one thing everybody agrees on, it’s that we need to do something about America’s health care system.

As someone who’s spent a lot of time outside the country, I’ve seen a wide variety of health care systems.

I’ve been in plenty of countries where the quality of health care is just as good as the U.S., but overall outcomes are better. And most importantly, prices are a fraction of ours.

The problem in the United States is that the insurance tail wags the health care dog.

In other countries, insurance is designed around the health care system. In the U.S., health care practices are shaped by the profit-based insurance industry.

This topsy-turvy approach creates strange outcomes.

For example, the first time I saw a U.S. medical bill was in early 2008, after I returned from South Africa. I was shocked to see a charge of over $1,000 for a routine test.

I frantically called the human resources department at my employer to express my concern. They laughed and told me not to worry — the price patients eventually pay is only a fraction of what’s invoiced.

Since then, I’ve experienced the absurdity of American health care enough to know that the possibility of a “Medicare for All” program is real.

That calls for some seriously strategic investing.

Here We Go Again

Anyone invested in health-related stocks needs to think about adjusting to new realities.

The more government-focused approach to U.S. health care espoused by Sen. Bernie Sanders, D-Vt., and others would create some big losers … but some big winners, too.

It may seem odd to talk about a big shift in U.S. health care policy so soon after the fight over Obamacare.

But Obamacare had two problems that made it vulnerable to being replaced by an even more radical approach — Medicare for All.

First, Obamacare was supposed to bring order to the crazy U.S. health care market. But it just entrenched the dominance of insurance over health care.

It’s brought more people into the insurance market … but it hasn’t solved unsustainable escalation in the price of care.

Second, Obamacare was signed into law by former President Barack Obama.

As you may have noticed, President Donald Trump’s top priority has been to undo everything accomplished by his predecessor. That includes Obamacare.

Since it couldn’t repeal it, the Trump administration has deliberately damaged Obamacare. That includes dropping the individual mandate and allowing insurers to sell cheaper, stripped-down policies.

But that has simply re-created the problem of people having insurance that doesn’t actually insure much of anything.

Here Comes Bernie

What would happen if the U.S. government adopted a Medicare for All policy?

Let’s start with the downside:

  • Private U.S. health insurance companies would essentially be wiped out. The only market left of them would be boutique, top-up policies for the rich. The guaranteed mass market provided by Obamacare would be gone. That’s why just the rumor of Medicare for All caused insurance company shares to lose $28 billion in market value last Tuesday.
  • Private hospital groups would lose their inflated profit margins. For example, Medicare pays $17,000 for a knee replacement. Private insurers pay $37,000 for the same treatment. That’s more than twice as much. Medicare for All would cut those profits in half — as much as $150 billion of annual revenues gone.
  • Pharmaceutical and medical equipment producers would lose too. A government-funded program would introduce negotiated pricing and impose price caps on both industries. Last week the S&P 500 Health Care Equipment Index dropped 4.3%, while the Nasdaq Biotech Index fell 4.5%. Big pharmaceutical companies lost 4% to 6% of their value.

But it’s not all doom and gloom:

  • Operators of medical clinics and urgent care centers could get a big boost. Companies that operate chains of small local clinics have been a big growth area in the last decade. Not only do they increase access to medical care, they have learned how to reduce costs without concentrating operations around big hospitals. A Medicare for All approach would probably try to leverage this growing industry to make low-cost care more accessible and steer people away from expensive hospitals.
  • Home health care providers will benefit too. Because of its target population of seniors, Medicare has a lot of experience in the home health care market. Again, Medicare for All would probably try to make more use of home health care services.
  • Some pharmaceutical companies will do well. Makers of generic medications should get a good boost. Companies developing medications to treat lifestyle-related illnesses like cardiovascular disease and diabetes could benefit from government efforts to reduce overall treatment costs.

Pay Close Attention…

Over the next weeks and months, people are going to give you contradictory advice about health care investments.

Some are going to tell you that the Medicare for All thing is going to blow over. I don’t think so.

Nobody knows what the final policy will look like. But American health care is in worse shape than most people realize. Something’s gotta give.

Others will tell you to buy the dip on the health care stocks that have taken a recent beating. But I think that’s a dicey strategy.

Stocks of insurance and hospital group companies are going to be more volatile going forward — and unless you’re a short-term technical trader, volatility inevitably leads to losses.

My advice is to pay careful attention to the unfolding debate on health care policy. I’m convinced that there are going to be winners, like clinic and urgent care chains and home health care services.

Until then, remember that my Bauman Letter pays special attention to health care-related issues. As more information emerges from the evolving debate over health care, I’ll narrow down to specific companies.

And when I do, readers of The Bauman Letter will be the first to know!

Kind regards,

Ted Bauman

Editor, The Bauman Letter