By The Sizemore Letter<\/u><\/p>\n
Last week I explained why I hate ObamaCare<\/a>.\u00a0\u00a0 I won\u2019t get into those details again, but I will explain some of the issues we face as investors.<\/p>\n The biggest issue is simply that of the unknown.\u00a0 Because ObamaCare–officially called the Patient Protection and Affordable Care Act–has so many moving parts, it\u2019s hard to say what its long-term effects will be on the assorted companies that make up the health care sector.<\/p>\n I\u2019ll start with insurance.\u00a0 Given that Americans will now be required<\/i> to buy health insurance, the industry as a whole should expect to see 48 million new customers (i.e. the number of Americans currently without health insurance).\u00a0 This should be a major boon to insurers like UnitedHealth <\/b>(<\/span>UNH<\/a>)<\/span>, Humana <\/b>(<\/span>HUM<\/a>)<\/span> and Aetna<\/b> (<\/span>AET<\/a>)<\/span>, right?<\/p>\n Not necessarily.\u00a0 In fact, American Health Insurance Plans\u2014the industry lobby group\u2014spent $102 million<\/a> trying to defeat the legislation.<\/p>\n ObamaCare will bring a boost to insurance company revenues. But it will almost certainly come at the expense of margins.\u00a0 Remember, some of the currently uninsured are people who are effectively uninsurable, or those with preexisting conditions.\u00a0 These new customers are money losers for the industry.<\/p>\n Muddying the waters more are the provisions regulating the \u201cmedical loss ratio.\u201d\u00a0 Under ObamaCare, insurance companies will have to spend at least 80% of the premiums you pay on actual health care expenditures (as opposed to administrative overhead).\u00a0 Or flipping the numbers around, the insurance companies would have to limit their overhead to no more than 20% of their premiums received.\u00a0 Any insurance company that went over these levels would have to pay their customers a rebate.\u00a0 Currently, many health insurers have numbers closer to 25%-30%.<\/a><\/p>\n And because ObamaCare give the federal government unprecedented regulatory control over the industry\u2014and given the politicization of health care\u2014it\u2019s hard to see the insurance companies being allowed to fully benefit from any improvements.\u00a0 \u201cExcess\u201d profits will result in calls for premium reductions or rebates.<\/p>\n I\u2019m not defending the health insurance industry.\u00a0 In fact, I dislike these people on a personal level. Give me five minutes alone with\u00a0 the CEO of any major health insurance company, and I don\u2019t know that I would be able to stop myself from brutally kneecapping them with a tire iron.\u00a0 My hostility is a product of years of filling out maddening paperwork and spending a small fortune on premiums for lousy coverage.<\/p>\n But I digress.\u00a0 My point is simply that, over the long term, ObamaCare is not necessarily bullish\u00a0 for health insurance stocks.<\/p>\n The story is a little less ambiguous with for-profit hospital chains, such as HCA Holdings <\/b>(<\/span>HCA<\/a>)<\/span> and Tenet Healthcare<\/b> (<\/span>THC<\/a>)<\/span>\u2014both of which are up big this year.<\/p>\n Reducing the number of uninsured patients eases the strain on the emergency rooms and eliminates a large chunk of the hospital\u2019s bad debts.\u00a0 It won\u2019t eliminate them, mind you. There will always be some number of people without insurance\u2014such as those who are habitually unemployed and don\u2019t file tax returns\u2014and some low-income patients may have a hard time paying their deductibles and copays.\u00a0 But it potentially makes a big problem a lot smaller.\u00a0 Doctors and nurses may find some of the legislation\u2019s micromanagement to be costly and cumbersome, but for the hospital companies themselves ObamaCare is mostly a positive.<\/p>\n The most frustrating aspect for an investor looking to allocate funds to the health sector is that politics and regulatory muddle trump economics and demographic trends.\u00a0 It\u2019s great to know that the aging of the Baby Boomers will create unprecedented demand for medical services and devices.\u00a0 But how do you invest accordingly knowing that the profit margins will be taxed and regulated away?<\/p>\n My favorite way to play the sector is via medical office REITs.\u00a0 Doctors face years of bureaucratic hassle in implementing ObamaCare that may affect their take-home pay.\u00a0 But they are still going to pay their rent every month.\u00a0 The rising health needs of the Baby Boomers will create an ongoing need for new medical facilities, and frankly, I\u2019d rather be the landlord than the doctor.<\/p>\n A medical office REIT I particularly like is the Healthcare Trust of America <\/b>(<\/span>HTA<\/a>)<\/span>.\u00a0\u00a0 The REIT has a growing portfolio currently consisting of 250 properties with a total purchase price of $2.7 billion.\u00a0 It also happens to pay a handsome 5.2% dividend which I expect\u00a0 to see grow in the coming quarters.<\/p>\n One nice aspect of HTA is that it is a young REIT.\u00a0 The REIT was founded in mid-2006 and only began trading in 2012.\u00a0 This means that HTA missed most of the run-up in property prices in the mid-2000s and has comparatively few \u201clegacy\u201d properties purchased at inflated priced.<\/p>\n And as an added sweetener, HTA saw a steady stream of insider buying<\/a> throughout the summer’s “taper tantrum” that saw the prices of many REITs — including HTA — get hammered. Four company officers bought a combined 33,000 shares worth $343,940 in the month of August alone.<\/p>\n Charles Lewis Sizemore, CFA, is the editor of the\u00a0Sizemore Investment Letter<\/a>\u00a0and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he was long HTA.\u00a0Click here<\/a>\u00a0to learn about his top 5 global investing trends and get your copy of \u201cThe Top 5 Million Dollar Trends of 2013.\u201d \u00a0This article first appeared on InvestorPlace<\/a>.<\/em><\/p>\n This article first appeared on Sizemore Insights as Investing in Healthcare in the ObamaCare Era<\/a><\/p>\n