HMOs & Drug Stores: Legislative Gains

10/24/2003 12:00 am EST


Michael Norman

Publisher, Economic Contrarian Update

"Market sentiment is much more upbeat now than it was several months ago; as a contrarian, that makes me worried," says Mike Norman, editor of The Economic Contrarian Despite his overall caution, Norman sees opportunity in HMOs and drug stores due to pending legislation.

"As a result of our market assessment, we are currently cautious on the outlook for the stock market. But take heart, because there is one sector where equity investors may be able to ride out a storm. That is the healthcare sector. I continue to like the healthcare and drugstore chains. These areas will be carried along by numerous emerging--and very powerful--new paradigms. The demand for healthcare services is increasing, and that will remain the case for a long time. Much of this demand is based upon the simple demographics of an aging population, however, you can add into the mix, a prescription drug bill, which is likely to be passed by Congress soon, and which will have a major impact on many companies in the healthcare sector.

"Several prescription drug bills are moving through Congress, and while there is no final version yet, they all have one primary goal: capping the price of prescription drugs. While this action is likely to be negative (initially) to many of the pharmaceutical companies (that's why they are lobbying so hard against it), the new law will be positive for healthcare providers and drugstore chains, as it will allow a larger segment of the population to get medication that they otherwise would not have been able to afford.

"Drug makers may suffer, at least initially, because the law will cap how much they can charge for drugs. However, the winners are likely to be healthcare providers, who will see higher profits as they pay fewer claims, thanks to more people on medicine. For the HMOs and healthcare providers, it will mean more people remaining healthy for longer periods of time. That will mean fewer claims having to be paid out, with the same volume of premiums coming in. Profits will rise. To profit from this legislation investors should buy stock in the following companies among HMOs and healthcare providers:

Coventry Health (CVH NYSE)
UnitedHealth Group (UNH NYSE)
Wellpoint Health Networks
Priority Healthcare
Oxford Health Plans

"Drugstore chains will also get a boost too, because of the higher volumes of medications sold, with little impact to their profit margins. Our top picks among drug store chains are:

Rite Aid
Duane Reade
Longs Drug Store

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