For an industry that's supposed to be burdened by the launch of Obamacare, the health-care business is doing pretty well. Stocks of health-care companies are up almost 40 percent this year, the strongest performance of any sector in the S&P 500.
This is despite, for insurers, new regulations on the "medical loss ratio" which require them to spend at least 80 percent of premiums on health care -- in practice, capping their profits and administrative expenses such as advertising at 20 percent. How about the medical-technology manufacturers that were slapped with an excise tax? Doing just fine. The hospital chains that face lower reimbursement rates from Medicare patients? They're doing well, too.
Health care is a business, and businesses are supposed to make money. Still, it's a bit concerning that health-care investors are so upbeat just as President Barack Obama's health-reform law goes into effect.
It makes you wonder where the new profits are expected to come from. If they're earned in a competitive market, great -- but health care in the U.S. hasn’t been a free market in decades, so it’s worth turning a skeptical eye.
The law will give the insurance industry millions of new customers and subsidizes its products. It brings millions of others into the market for health-care services through its Medicaid expansion. If health-care investors are throwing a party, it might be because the rest of us are paying for it.
Economists call profits in excess of what would be earned in a competitive market "rents." Often it's hard to tell the difference -- but the expected increase in health-care profits has a whiff of rent about it. After all, Obama passed his law with the support of the health-care industry. The insurers signed on. Pharma signed on. Doctors signed on. It would be shocking if this law reduced their rents.
Regulation is the usual remedy. Public utilities commissions, for example, determine the “fair profit” of electric utilities and prevent them from squeezing customers. In health care, this hasn’t been the Obama administration’s approach. A headline on a recent piece by Adam Davidson put it best: “The President Wants You To Get Rich On Obamacare.” It said that Tom Scully, a private-equity executive who has been pitching health-care investments, leaves investors expecting a gold mine:
No matter what investors thought about Obamacare politically -- and surely many there did not think much of it -- the law was going to make some people very rich. … With the right understanding of the industry, private-sector markets and bureaucratic rules, savvy investors could help underwrite innovative companies specifically designed to profit from the law. Billions could flow from Washington to Wall Street, indeed.
The health-care reform gives health-care suppliers one of the benefits enjoyed by utilities: safe profits. But the quid pro quo -- that those profits should be moderate -- seems to be missing. That's the assessment of investors, anyway. For now, at least, they aren't looking at Aetna the way they look at Con Ed.
(Evan Soltas is a contributor to the Ticker. Follow him on Twitter.)