While the news on the healthcare reform is filled with backslapping from one political party and hand wringing from the other, the truth for advisors and their clients is that this historic legislation might be as much an investment opportunity as anything else.
In a research note, J.P. Morgan Funds Chief Market Strategist David Kelly said that from the market’s standpoint, the passing of the healthcare reform bill in its current state is generally more positive than negative.
However, the money to pay for it has to come from somewhere, and that’s going to impact wealthier individuals when the new law goes into effect.
Beginning in 2013, people earning more than $250,000 annually will see Medicare taxes increase to 2.35% from 1.45%, and the same group will be hit by an additional 3.8% Medicare tax on investment income.
That’s not all. Kelly said the dividend and long-term capital gains tax is likely to rise from 15% to 20% next year for people earning more than $250,000, who, with the Medicare tax on investment income, will be saddled with a total 23.8% burden, reducing wealthy investors’ income stream by 10.4% compared to what they’re paying today.
Advisors have some time to reconfigure their clients’ accounts to adjust for this tax hike, though. As Peter McFarland, a Raymond James advisor at Central Bank & Trust in Lexington, Ky,, said, “Many clients have more capital losses than they’ll ever have in a lifetime. I have some clients carrying $200,000 forward in capital losses.”
Margaret Starner, an advisor at the Starner Group of Raymond James in Coral Gables, Fla., said the details surrounding taxation have yet to be thrashed out and may well change, but added that her clients expected tax hikes due to the deficit.
“Most clients are worried on a personal level, not the macro level,” she said. “They want to know if they’ll be negatively impacted more by an impairment to their healthcare than rising taxes, which everyone knew would go up. And no one’s surprised Obama decided to tax higher income people.”
In terms of investments, the healthcare sector might not be a bad bet. The bill expands coverage to 30 million new customers, but it doesn’t do much to rein in costs. “While there are many constraints preventing insurance companies from limiting coverage there are few which limit how much they can charge for it,” Kelly wrote.
Pharmaceutical companies are also likely to enjoy a boost from having 30 million new prospects. While pharmaceutical companies will pay $107 billion in taxes between 2011 and 2019, the bill doesn’t cap prices for drugs, and these companies may well simply pass on the cost of doing business through the prices they charge their new customers.
“We’re looking at opportunities in United Healthcare and some of the pharmaceutical companies,” McFarland said. “Think of where stocks like Pfizer and Merck are now compared to where they were in 1998 and 1999.”
Starner said that she is also keeping a watchful eye on all the ancillary business that are likely to benefit from the transformation of the healthcare industry over the next decade.
“Companies that produce medical supplies will be in huge demand,” she said. “Consulting firms will also be huge beneficiaries of this transformation and there will be a huge expansion of employment throughout the healthcare sector that will benefit payroll companies.”
As for the health of the economy, Kelly isn’t too worried: “Despite dire predictions, it’s not clear that health care reform will really slow economic growth that much. Most of the tax provisions don’t kick in until 2013 and the mandates on businesses and individuals don’t take effectin a big way until 2016. Between now and then, the economy is quite capable of staging a full cyclical recovery,” he said.
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