August 24, 2009
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Kris Jenner, portfolio manager of the T. Rowe Price Health Sciences Fund, recently shared his insights on the current state of health care reform as well as his favored industries within the health care sector. The following was based on an interview with Mr. Jenner on July 22, 2009. |
Washington has stated that its goal is to bring down the nation’s health care costs and provide coverage for millions of Americans without insurance. It’s a tall order—lower costs and provide more coverage.
However, right now the health care reform proposals appear to be nothing more than expanded coverage. But the government has to do something because health care costs are rising at what many believe is an unsustainable rate—much faster than the growth of the economy.
- The quandary: If you give 30 to 40 million people health care coverage that previously had none, they are going to consume more and it will cost more.
As a result of the uncertainty regarding the reform initiatives, health care stocks have been trading at a discount to the broad market. Additionally, the marketplace expects a significant improvement in third- and fourth-quarter earnings of non-health care companies.
In the broad market, earnings are depressed but stocks performed well. Investors have been anticipating a second-half economic recovery, which has led to higher multiples.
- Health care companies, on the other hand, posted good first-quarter earnings but the stocks performed poorly. The marketplace could be poised for better earnings growth outside the health care sector.
Health care is an enormous piece of our economy. There are many subsets within the sector—which represents about 16% of the country’s gross domestic product—but it is impossible to make a sweeping statement about the entire universe of health care companies.
- We favor the prospects for the health care information technology segment. The need for automation, better recordkeeping, and documentation is growing. Hospitals, for example, are going to have to be able to demonstrate improved outcomes relative to their peers—they need to be able to link with one another and to their physicians. To do this, they need better information technology systems.
- Generic drugs are another area that should be relatively unscathed by reform. In the near term, generic pharmaceuticals can provide the most cost-effective therapies for the health care system. However, it is overly simplistic to say, “there’s the answer” because there would be no generic pharmaceuticals industry without innovative pharmaceutical companies in the first place. We believe that over the next three to four years, utilization of generic drugs is going to increase due to cost pressures.
- Areas where we remain cautious include medical device makers, large-cap pharmaceuticals, and for-profit hospitals—segments that can expect dwindling reimbursement levels from Medicare-like programs.
Reform Presents Challenges and Opportunities
- There has yet to be any substantive debate about reforming the system that would lead to greater efficiencies. The current health care reform plans do nothing to change the trajectory of health care costs.
- Some form of rationing that balances heath care outcomes and the cost of treatments needs to be implemented. The payor/provider incentive reform is the real issue that needs to be addressed.
- Ultimately, consumers are going to have to be responsible for their health care decisions. The notion that health care should be available to all, regardless of their ability to pay, is an issue that has the capacity to bankrupt our nation.
- This is the most challenging and exciting health care investing environment. There is the potential for sweeping policy change—the winners will adapt and take advantage of the changing landscape.
Companies in the health sciences field are subject to special risks, such as increased competition within the health care industry, changes in legislation or government regulations, reductions in government funding, product liability or other litigation, and the obsolescence of popular products.
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