Pelosi Reveals House Healthcare Strategy

At 10:30 New York time, House Speaker Nancy Pelosi and others unveiled the latest version of the health care reform bill.  Among the losing stocks lately have been a number of healthcare companies, including WellPoint (NYSE:WLP), United Health Group (NYSE:UNH), and Aetna (NYSE:AET).

These companies are hoping to get more clarity on the proposed bill so they can adjust their business models accordingly.  Fair warning, I’m going to gloss over many details here in order to make this discussion manageable.

The simple version of the story is that healthcare providers, like these, typically get paid less per dollar of care (reimbursement) from government insurance programs (Medicaid, Medicare, and COBRA) then from private insurers.  These companies, and many investors, will be listening for details regarding reimbursement rates for the proposed public option.

If we look at some of the biggest stock market losers from yesterday, the list is literally crawling with wounded healthcare stocks.

The biggest loser yesterday was Psychiatric Solutions (Nasdaq:PSYS), down 22%.  It appears the inpatient behavioral hospital missed target profits and cut forecasts.  Investors are shedding the stock, and likely a few tears.  I haven’t followed this company, but the results don’t surprise me.

The business model for psychiatric services is generally poor.  The one-on-one provider-patient relationship is too costly, and insurance reimbursement rates are awful, especially for a hospital like Psychiatric Solutions which treats a lot of children and seniors.  Both Medicare and Medicaid typically pay far less than private insurance.  The company’s operating margin of 14% and net profit margin of less than 6% illustrate the point.

However, the one sector I do like in healthcare is in transaction and transcription related businesses.  The bottom line numbers for these companies are benefiting from the switch to digital medical records.  They can make healthcare providers more efficient, saving them money while allowing for higher patient volumes. 

Transaction and transcription companies make money each time a payment takes place, or when physicians convert medical records into digital format. Back in February, I recommended SXC Health Solutions (Nasdaq:SXCI) around $20, now it’s over $40.  I also own a couple of these stocks in my SmallCapInvestor PRO portfolio, and in yesterday’s tough action they held up well.  I like resiliency. Since I bought shares in the beginning of September and October, both stocks are showing gains.  One is up 12%. (Click here to start a trial to SmallCapInvestor PRO and get my comprehensive research on these stocks.)      

The problem with the rest of healthcare right now is uncertainty regarding the future.  Most of the time the healthcare reform debate comes up, it seems like a temporary discussion.  But this time it’s different, and that means providers are holding their breath.

Back to the market movers, it’s time to find a healthcare stock that gained yesterday.

On the small-cap top loser list are several biotechnology stocks.  Two of these are StemCells, Inc. (Nasdaq:STEM), down 17% and ViroPharma (Nasdaq:VPHM), down 18%.  I’ve said it before, and I’ll say it again. I don’t like biotechs because they’re too news driven.  

And the list of healthcare losers goes on…  USANA Health Sciences (Nasdaq:USNA), down 18%, EnteroMedics (Nasdaq:ETRM), down 17%... This performance is making me sick, literally.

Amid the carnage I was finally able to find one bright spot, a healthy small-cap stock on the top gainers list.

NutriSystem Inc (Nasdaq:NTRI) had a great day.  The weight-loss company added 12% to its waistline on better than expected earnings.  Ok, maybe calling a weight management company a healthcare stock is a little bit of a stretch.  But on down days like we’ve had, you need to give the market a break.  And try to maintain your sense of humor.

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