Prognosis: To Be Determined

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Baird experts weigh in on evolution, opportunity and uncertainty across Healthcare


The Healthcare sector is undergoing a seismic shift. Evolving regulatory demands, market forces and political matters are fueling major developments in services, payment, policy and treatment in healthcare systems around the world, and particularly in the U.S. The implications of this evolutionary period for consumers, patients, providers, payers and sponsors are significant – as are the opportunities for companies and investors.

Given the ongoing developments in the Healthcare market, we recently sat down with two Baird experts, Mike Bernstein and Whit Mayo, to get their perspectives on the state of the industry, what might be at stake in the upcoming U.S. presidential election and where they see opportunity in today’s market.

Why is the state of the healthcare industry a major issue in the upcoming U.S. presidential election? How is the sector preparing for the post-election landscape?

Mike Bernstein – Partner, Baird Capital

I would say we are at a turning point and there's a significant amount of uncertainty around which way things could go. We've seen tremendous changes in the healthcare industry since the Affordable Care Act (ACA) was signed into law in 2010. With a new administration, it could go one of two ways: We could see an acceleration of these healthcare reforms. That would mean that some of the work that's being done right now in bundling payments and sharing risk across providers of care would finally take root and occur on a broader scale, rather than in a more isolated space like it is right now. Or, despite the conventional wisdom that the ACA is here to stay, the election dynamics imply the possibility that we could see a repeal or major retrenchment of the ACA, which could be very disruptive to a lot of the development that's resulted from the ACA. The emerging realization that the big commercial payers are losing so much money in the state health insurance exchanges and their willingness to withdraw adds to that uncertainty. 

Whit Mayo – Senior Research Analyst, Healthcare Facilities & Services

While there is an element of uncertainty that settles into any sector when the outcome of a presidential election is unknown, historically the healthcare industry has demonstrated an ability to pivot and shift in changing environments, as well as adapt well to regulatory and reimbursement changes. I believe some clear policy ideas are probably here to stay. I'm seeing a lot of healthcare companies adopting innovative strategies such as bundled payment arrangements and the organization of post-acute care and I don't think that will change, regardless of who the next administration is.  

With that said, we do acknowledge a legitimate "election risk" on trade in the coming month, because stocks in sectors like healthcare can be more sentiment driven than the actual fundamentals would suggest. 

Whit, can you tell us more about some of the innovative strategies you are seeing across Healthcare Facilities & Services?

Mayo:

The post-acute care sector remains one of the most disorganized areas within the U.S. healthcare delivery system – overwhelmingly for profit, fragmented ownership, and wide variances in type and quality of clinical care offered. To capitalize on opportunities, a number of home health companies, such as Amedisys, Inc. (AMED) and LHC Group, Inc. (LHCG), are trying to build strategies to engage hospitals to partner with them. HealthSouth Corporation (HLS) has acquired post-acute care and home health capabilities, and has built out a clinical collaboration strategy. Another example is HCA Holdings, Inc. (HCA), which has adopted strategies to engage their physicians and discharge planners to understand what the true cost of care is for patients once they leave their facilities in an effort to lower costs and improve outcomes. 

What do you make of regulators' current interest in payer and provider consolidation, and what does that mean for the industry?

Bernstein:

We're seeing the Federal Trade Commission demonstrate some real hostility to both payer and provider consolidation, citing that reduced competition will ultimately lead to higher prices for consumers. Big mergers of payers and even some of the smaller mergers of hospital systems like Advocate Health Care and NorthShore University HealthSystem in Chicago have been rejected by anti-trust regulators, at least in the initial stage. Whether these deals are allowed to move forward once a new administration takes office is unclear at this point, creating huge uncertainty in the outlook for M&A amongst the payers and providers that want to consolidate. 

What areas are you watching and where are the potential opportunities for investors?

Bernstein:

We're very focused on behavioral health as an investment opportunity, with two of our favorite themes being substance abuse treatment and autism. From our perspective, there is a fair amount of fragmentation in the marketplace that makes those two areas particularly investible. 

The other area we like a lot is payer services, or the businesses that help payers be more efficient and successful. Whether consolidation in the industry continues or whether it's disrupted by the political environment will have some bearing on whether these businesses are as successful as they could be. 

Mayo:

Behavioral health is a sector where we've been very bullish for some time. We've endured forty years of de-institutionalization within this sector. Under the ACA, seemingly all health plans are now required to provide the same level of mental health benefits as they do for medical and surgical benefits. For the first time in many years, we're seeing a lot of developing policy initiatives intended to strengthen access to mental health and create parity across health plans for what they're required to pay. Even more recently, Medicare has amended the rules for Medicaid managed care to allow adult Medicaid beneficiaries to receive inpatient treatment at psychiatric facilities where as the federal reimbursement dollars have previously precluded that population from receiving treatment.

Given the high demand for quality mental health treatment and current lack of access, it's going to be an area dollars will go to, not away from. We also like it because it's a lot less sensitive to the outcome of the presidential election. Our two favorite stocks that we believe provide investors exposure to the fundamental tailwinds behind the behavioral industry are Acadia Healthcare Co., Inc. (ACHC) and Universal Health Services, Inc. (UHS)

Do you have any guidance for investors who might be concerned about what this uncertainty means for their portfolios?

Mayo:

I often feel like the more things change, the more they stay the same. As I look at healthcare investing, I believe that politics can often be your friend. Clearly there is uncertainty around not knowing who will be in the White House, who will be running the Department of Health and Human Services, or who will be in charge of the Food and Drug Administration, but I think the market has historically done a pretty good job discounting the uncertainty. 

I've always subscribed to the theory that bad news is more often better than no news. I'm optimistic that in the next month or so we'll have an idea of who the next administration will be and begin to see an actual healthcare platform take shape that will result in emerging winners and losers that create opportunities for investors.

To learn more about Baird’s comprehensive Healthcare platform, visit healthcare.rwbaird.com.

 An investment should not be made on this content, as this is not a complete analysis of every material fact regarding any company, industry or security. Please click here for a complete list of the companies Baird covers. 

This interview took place in August 2016. The links to the research reports for the companies mentioned herein were current as of the interview and may no longer be the current opinions of the analysts. For current research reports, please contact Baird. An investment should not be made based on this content, as this is not a complete analysis of every material fact regarding any company, industry or security. Please click here for a complete list of the companies Baird covers. Baird and its operating affiliates have offices in the United States, Europe and Asia. Robert W. Baird & Co. Incorporated. Member SIPC. Robert W. Baird Ltd. and Baird Capital Partners Europe are authorized and regulated in the UK by the Financial Conduct Authority.