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S&P Equity Research; Health Care Reform After The Buzzsaw - Where Are We Now?

NEW YORK, Feb. 8 /PRNewswire/ -- With the recent election of Senator Scott Brown in Massachusetts resulting in the loss of the Democratic supermajority, the urgency behind broad-based health care reform with the promise of universal coverage for the majority of uninsured Americans has faded dramatically, according to Standard & Poor's Equity Research.  President Obama recently noted the country is closer than it has ever been to passing what has been for many a long sought after social reform, and the President called upon the Congress to "finish the job."  Given this backdrop, Standard & Poor's Equity Research expects the fervor for health care reform to calm as the President refocuses his domestic agenda on righting the economy and job creation, while party leaders work to find bipartisan support for more incremental reforms.

S&P Equity Research expects the President to work to repair some of the partisan discord that broke out during his initial attempts at reform, and we expect his efforts at reform to focus on areas of common agreement and populist discontent.  Given our view there is broad agreement among the parties about three broad points – the need to slow the pace of growth in health care expenditures, the desire to eliminate waste and inefficiency in health care, and a preference for instituting quality measures – S&P Equity Research expects more modest reforms over time.  Among areas we see most ripe for accord include: elimination of annual and lifetime insurance benefit limits; restrictions on denial of coverage due to pre-existing conditions; the creation of purchasing mechanisms for self-employed and small businesses to give them access to coverage at group rates; incentives for use of electronic health records (HER); and increased coverage of preventative care and disease management.

S&P Equity Research believes the health insurance industry will face the brunt of any scaled back bill as insurance companies remain vulnerable to government intervention and are an easy target of any populist revolt.  One of the most likely and popular proposed reforms among both parties is the elimination of preexisting condition clauses in health insurance plans.  In response, we would expect the managed care organizations (MCOs) to move clients with preexisting conditions into medical management programs whereby the MCOs require certain regimens of care lest patients face financial penalties.  S&P Equity Research would not be surprised to see the government incent the MCOs with tax breaks or subsidies for such programs, so that insuring people with preexisting conditions does not become a money-losing proposition for the MCOs.  Even with these incentives, assuming Medicaid and/or Medicare Advantage enrollment grows faster than commercial enrollment; the MCOs are likely to see increasing margin pressure in the form of rising medical loss ratios.  Moreover, any expansion of Medicaid eligibility and continued Medicare Advantage reimbursement rate pressures should exacerbate this margin pressure.  In this environment, S&P Equity Research believes the pure-play Medicare Advantage providers and pure-play Medicaid players could benefit as they have experience controlling costs by transitioning members into more restrictive provider networks and through more active management of care.  Over time, S&P Equity Research expects all MCOs to increasingly adopt similar tactics.

The loss of the Democratic supermajority in the Senate may lead to upward earnings revisions for companies that could have been hurt by some of the health care reform proposals floated on Capital Hill.  We think many companies' 2010 earnings estimates incorporated potential costs that would have resulted from reform legislation.

S&P Equity Research believes the possible downsizing of health care reform could be beneficial for many of the medical device manufacturers who we believe had assumed they would have to accrue reserves to cover the costs associated with a possible medical device tax beginning in 2010 for payment in 2011 and now may no longer have to face that liability.  In fact, on its fourth-quarter 2009 earnings call, St. Jude Medical (STJ 38 ***) noted it assumed such a tax in its 2010 guidance and any failure of reform to pass could mean upside to its possible earnings estimates.  As a result, we believe there is potential upside to the profit estimates for the entire medical device group, and especially the smaller device manufacturers whom we think would have been disproportionately impacted by the tax.

We also believe any scaling back of reform would be a near-term positive for the pharmaceutical companies as it would eliminate the proposed $80 billion in fees and concessions agreed to by the industry to help fund reform.  However, we note that any curtailment of reform may raise the undesirable prospect of the government revisiting direct negotiations of Medicare drug pricing in lieu of the $80 billion in fees and concessions.

S&P Equity Research views a more limited health care reform plan as potentially negative for the biotechnology industry.  Currently there is no regulatory approval process for generic versions of biotechnology drugs (biometrics) whose patents have expired.  As health care reform was being debated in D.C. over the last few months, one key component of any legislation was to create such a regulatory approval process.  After much debate, both of the proposed bills included an exclusivity period of 12 years for biotech drug makers before a biogeneric could enter the market, despite calls for a period of between 5-7 years from several Congressional leaders and the White House.  The 12-year exclusivity was viewed as a winning scenario for the biotech industry.  Given that President Obama had called for the shorter period when legislators were trying to reconcile the two bills, we expected a new round of lobbying over the issue as reform legislation is revamped, and we see potential for the exclusivity period to be shortened once again, which we would view as a negative for the industry.

S&P Equity Research believes any cutbacks in proposed reforms would be generally negative for the heath care facilities providers, most notably the acute-care hospitals.  While any scaling back of reform is expected to eliminate the $155 billion in reimbursement concessions already agreed to by the industry to help finance reform, it could also mean that the great majority of the uninsured do not get health insurance benefits, thus leaving the industry with no near-term solution for its most pervasive problem: uncompensated care or care for which it is not reimbursed, (uncompensated care currently comprise about 20% of total revenue).  Moreover, in S&P Equity Research's view, with dramatic growth in health care expenditures and ensuing budgetary pressures, Medicare will likely be forced to seek future rate reductions from hospitals that would be even more severe than the $155 billion that had been agreed to.

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Standard & Poor's equity and fund research draws from STARS coverage and detailed financial information, such as valuation models, sector and peer group analysis, and proprietary Standard & Poor's metrics such as Fair Value and Quality Rankings, on global equities.

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S&P Global STARS Distribution

In North America

As of December 31, 2009, research analysts at Standard & Poor's Equity Research Services North America recommended 33.7% of issuers with buy recommendations, 54.3% with hold recommendations and 12.0% with sell recommendations.

In Europe

As of December 31, 2009, research analysts at Standard & Poor's Equity Research Services Europe recommended 31.5% of issuers with buy recommendations, 44.0% with hold recommendations and 24.5% with sell recommendations.

In Asia

As of December 31, 2009, research analysts at Standard & Poor's Equity Research Services Asia recommended 35.6% of issuers with buy recommendations, 51.4% with hold recommendations and 13.0% with sell recommendations.


As of December 31, 2009, research analysts at Standard & Poor's Equity Research Services globally recommended 33.5% of issuers with buy recommendations, 52.3% with hold recommendations and 14.2% with sell recommendations.

5-STARS (Strong Buy): Total return is expected to outperform the total return of a relevant benchmark, by a wide margin over the coming 12 months, with shares rising in price on an absolute basis.

4-STARS (Buy): Total return is expected to outperform the total return of a relevant benchmark over the coming 12 months, with shares rising in price on an absolute basis.

3-STARS (Hold): Total return is expected to closely approximate the total return of a relevant benchmark over the coming 12 months, with shares generally rising in price on an absolute basis.

2-STARS (Sell): Total return is expected to underperform the total return of a relevant benchmark over the coming 12 months, and the share price is not anticipated to show a gain.

1-STARS (Strong Sell): Total return is expected to underperform the total return of a relevant benchmark by a wide margin over the coming 12 months, with shares falling in price on an absolute basis.

This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you nor is it considered to be investment advice. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice.

This material is based upon information that we consider to be reliable, but neither S&P nor its affiliates warrant its completeness, accuracy or adequacy and it should not be relied upon as such. With respect to reports issued to clients in Japan and in the case of inconsistencies between the English and Japanese version of a report, the English version prevails. Neither S&P nor its affiliates guarantee the accuracy of the translation. Assumptions, opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Neither S&P nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

SOURCE Standard & Poor's



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