Profit from health reform's flaws

By Jim Jubak

The Senate Finance Committee today approved a health care reform bill cobbled together by Montana Sen. Max Baucus. And it's all but sure, thanks to a Congressional Budget Office report last week, that something like the bill -- or a stronger version -- will pass the full Senate and House by the year's end.

What you and I as investors now want to know is what stocks are going to make money from health care reform. I'll give you five ideas by the end of this column -- one of which I'll add to my Jubak's Picks portfolio.

Let's start with what we're reasonably sure any bill is going to do, and then I'll explain how the economics of "externalities," a type of hidden cost caused by external factors (explained more fully in my Oct. 6 post on the Jubak Picks blog), are going to create some surprising winners by undermining the bill's efforts to control costs.

• We know health care reform is expected to extend coverage to 94% of all Americans, up from 83% now. That's an extra 29 million Americans. But it's not everyone. According to the Congressional Budget Office's count, 25 million people who live in the United States, including 8 million illegal immigrants, still wouldn't have health insurance.
• We know it's supposed to cost $829 billion over 10 years.
• We know the budget office said last week that the bill would actually reduce the budget deficit by $81 billion over the next 10 years. Previously, the argument against the bill that most resonated with voters, if you believe the polls, was that it was so expensive that the country couldn't afford it. Republican senators opposed to the bill, which meant every Republican senator not from Maine, had been so sure that the budget office would say this bill would add to the deficit that they had labeled the budget arm of Congress an honest scorekeeper. So when the agency said the bill would actually reduce the deficit, the Republicans' "costs too much" strategy was left in tatters.
• And we know this bill would shift costs and profits around like crazy. At least that's what it's intended to do. The budget office's math assumes intentions are realities. Investors do that at their peril.

On paper, a whole lot of money would go to the insurance and health care industries. The government would spend $461 billion over 10 years to give tax credits to people so they could afford insurance. It would also spend $345 billion to expand Medicaid insurance to cover more of the poor.

Giving with 1 hand, taking with the other

But the bill -- still on paper, mind you -- also would take money away, sometimes from the same groups that it handed profits to just a subsection before. So the bill proposes wringing $404 billion in waste out of Medicare and other government insurance programs. That means the very drug companies, hospitals, doctors and, in some cases, insurance companies that benefit from having 29 million more Americans with health insurance. An additional $201 billion would come from taxes on what are being called Cadillac insurance policies. (Isn't it nice that Detroit's cars are still the symbol of luxury somewhere? The fight over what's a Cadillac and what's a Taurus is going to be especially vicious.)

Billions more will come from a grab bag of fees on insurance companies, medical-device makers and drug companies, and a change in the treatment of medical expenditures come tax time.

Video: A closer look at health care reform

The battle over exactly how these pluses and minuses would be distributed is going to engage Washington's best lobbyists for thousands of very expensive billable hours. Already the hospital industry has said the bill wouldn't cover enough of the now uninsured to justify the deal it made to give up $155 billion in government payments.

Expect the haggling to reach epic proportions.

Continued: "Externality economics"

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