Healthcare Reform: What Does It Mean for Investors?

Money managers say it may be too early to tell.

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Investors may be wondering what effect the passage of healthcare reform will have on health-related stocks or funds with healthcare holdings. Many money managers say the jury's still out, but it seems that many companies in the healthcare sector—like pharmaceuticals and insurers—will go under the microscope as the government strives to make healthcare more affordable and available.

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The biggest news for companies in the sector may be the new insurance mandate. For health insurers, this means a huge pool of new customers, but the current legislation will also aim to reform the way they do business. "They're going to have to take on more customers that they obviously wouldn't have otherwise, like customers with pre-existing conditions," says Morningstar analyst Chris Davis, who covers healthcare sector funds. "On the other hand, they're going to get over 30 million new consumers of healthcare."

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Mark W. Oelschlager, portfolio manager for Live Oak Health Sciences fund (symbol LOGSX), says health insurers will be the most directly affected by the new legislation. "What seems pretty obvious is there will be scrutiny and regulation of the healthcare industry," he says. "Right or wrong, the government is holding the health insurance companies accountable for healthcare cost increases." He says the health of the overall economy is the most important factor in determining the performance of stocks in the sector. In tough times for the economy, investors tend to flock to the stability of healthcare businesses.

Peter Morris, president of Homestead Funds, says he's confident that big pharmaceutical companies will be able to maintain their profitability. "They're not going to be immune to what happens with healthcare, but people are going to be buying drugs no matter who's paying for them. Whether it's the government, individuals, corporations, whoever—people are going to be buying drugs," he says.

The Homestead Funds Value fund (HOVLX) has almost a quarter of its assets in the healthcare sector, mostly in pharmaceutical companies like Pfizer, Bristol-Myers Squibb, and GlaxoSmithKline. "Their lobbying effort is very substantial," Morris says. "It's pretty safe to conclude they've protected themselves and their pricing power of their products to the extent that they can."

Brad Sorensen, director of market and sector analysis for the Schwab Center for Financial Research, says the firm is overweighting healthcare in investor portfolios for at least three or four months, mostly because companies have been beaten up in anticipation of healthcare reform. Otherwise, he says, it's too early to tell what the long-term effects of the legislation will be. "The big news is that taxes are going up and government spending is going up," he says. "Beyond that, there are wildly different estimates about how many people are actually going to get coverage under this."