When the Supreme Court upheld the Affordable Care Act in June -- allowing the government to use taxation to prod people to buy health insurance -- it was a victory for President Barack Obama and supporters of health care reform. If the law performs as advertised, tens of millions of Americans will benefit directly -- and if it truly lowers overall health care costs, every taxpayer will.
But there are other beneficiaries, too, and some might surprise you. For example: Weight Watchers (WTW).
Turns out, a host of health-oriented companies stand to see long-term financial gains from the implementation of Obamacare, and investors would do well to consider these healthy living sector companies. We're not talking about businesses that are direct Obamacare plays likely to see immediately skyrocketing stock values. Rather, these are solid long-term buys that should profit from the increased public sector focus on health.
To make your portfolio fatter, you might think about going with "thin" businesses.
Subsidized Health Products and Rotund Profits
The Affordable Care Act means that businesses need to provide health coverage for employees regardless of pre-existing conditions, and given that complications associated with obesity and diabetes drive some of the biggest costs in health care, more companies will likely start subsidizing Weight Watchers enrollments, for example, because preventative care for their employees will translate to lower rates with insurance companies.
"You are not going to be able to bend the health care cost curve, unless you can treat people who are pre-diabetic in a health care system that values people [and that] helps people before they get sick," Weight Watchers CEO David Kirchoff told DailyFinance.
"The Affordable Care Act attempts to get to that," Kirchoff said. "Encouraging [accountable care organizations], funding of preventative care treatment, colonoscopies, check-ups, mammograms. There's more of a recognition in general that doctors and the health care system need to get involved before things get worse."
"In a world like that," he continued, "we [at Weight Watchers] do better. It definitely helps: When there's a full or partial subsidy in place, we've seen increases in employee participation in programs."
On the basis of Weight Watchers' better performance where subsidies are more common, Morgan Stanley analyst Dara Mohsenian touted its long-term potential in his June 26 report on the company -- acknowledging immediate difficulties but forecasting bearish trends for its stock, given the ACA.
"Further stock weakness could be a buying opportunity," the report read. "Long-term, we continue to believe the market is not giving WTW enough credit for a massive shift in profit mix to the high growth and high margin .com business, which could be nearly 40% of profit mix in 2012, and makes total company valuation of only 10 times our below-consensus 2013 EPS forecast look attractive."
The report suggests that the new Jessica Simpson marketing campaign and the "continued healthcare ramp-up" would be driving forces for the company's turnaround in 2013.
And with the stock down 35% in the past 12 months, the current low price of Weight Watchers combined with its auspicious outlook suggests the possibility of high returns, Mohsenian wrote.
Meanwhile, as the economy improves, people will also have more disposable income to spend on weight loss programs. And job growth will mean more firms with more employees that have access to sponsored Weight Watcher enrollment.
There's also a paradigm shift under way: One of the most important changes the ACA has brought, Kirchoff said, is the wider recognition losing weight "is a health issue, not a vanity issue."
"That's not the state of the American psyche, but it's increasingly moving to that place," Kirchoff said.
How to Invest in Obamacare: Find Asset Growth in Weight Loss
Sadly for users of acupuncture, massage, chiropractic adjustment, herbalism and other medical treatments outside the mainstream, the Affordable Care Act will only cover "essential health benefits" -- an umbrella that, many analysts argue, does not include "alternative" or "complimentary" medicine. Some critics of the Affordable Care Act argue that this will, effectively, kill alternative medicine in America.
On the other hand, most insurers offer policies covering some form of alternative medicine, and they've done so without a federal mandate. Further, some states have required that insurance plans cover certain alternative treatments -- for example, in California, insurers must cover acupuncture and chiropractic. It remains to be seen if these individual states will keep their alternative medicine requirements.
There is some truth to this rumor, although it isn't nearly as comprehensive as Obamacare critics are arguing. In reality, the new tax, which goes into effect in 2013, would only apply to households making more than $200,000 per year, and would only be levied on extremely profitable capital gains. To be specific, you will have to pay this tax if you:
- Make more than $200,000 per year ($250,000, if you're married);
- Sell your home;
- And make more than $250,000 in profit on the sale ($500,000, if you're married).
Then you would have to pay a 3.8% tax on any profits above $250,000 ($500,000, if you're married). So, for example, if you and your wife earn $260,000 a year, and your sell your house for $510,000 more than you paid for it, then you would have to pay 3.8% tax on $10,000 ... or $380.
A grain of truth, yes -- but not quite as daunting home sales tax as the critics are arguing.
Under the requirements of the PPACA, companies with more than 50 "full time equivalent" employees have to offer a health care package that doesn't cost more than 9.5% of a given worker's salary. If enough workers don't opt into the employer-sponsored health care program, the company can face steep fines.
But there's a loophole: Companies don't have to offer health insurance to part-time employees. Consequently, conservative pundits have argued that many companies will shift to hiring only part-timers as a means of lowering their health care costs.
There may be some truth to this -- after all, the recession brought with it a 20% increase in part-time employees, as companies cautious about expanding their payrolls avoided full-time hires. Given that fact, it seems odd that the PPACA would offer yet another impetus for companies to avoid creating full-time jobs.
On the other hand, as Sarah Kliff recently noted in The Washington Post, when Romneycare passed in Massachusetts, there wasn't a mass shift toward part-time employees. Part of that can be credited to the fact that providing health insurance actually has some benefits for employers: In addition to encouraging employee retention, health insurance costs are paid for out of pre-tax dollars. In other words, a dollar paid into health insurance is worth more than a dollar paid into salary, an equation that benefits employers.
This is not just semi-true; it's plain ordinary true.
The requirements for employer-backed health insurance plans are that they have to cost less than 9.5% of an employee's salary. If an unmarried worker making more than 133% of the poverty line refuses to get this employer-sponsored (and, often, subsidized) insurance, he or she will have to pay a minimum penalty of $695 and a maximum of slightly less than 2.5% of yearly income. In other words, a single filer can choose to pay 9.5% of his or her income ... or a penalty of less than 2.5%.
As for employers with 50 or more employees, they will eventually be forced to pay a penalty of $2,000 for every full-time employee who opts out of their plan. Given that, in 2011, the average employer health insurance contribution for a single employee was $4,508, the average employer would save $2,508 per single worker by refusing to offer competitive insurance.
To further sweeten the pot, employers are not required to insure part-time workers, and can deduct their first 30 full time employees.
So, to take as an example a scenario inspired by the Congressional Research Service, consider a firm with 35 full-time employees, and 20 part-timers who each work 24 hours a week (equivalent to 16 full-time employees). The company would have 51 full-time equivalent workers. When the penalties finally go into effect, if the owner of that company chooses not to offer insurance, he will only have to pay $10,000 in penalties -- as opposed to $157,780 in health care contributions.
This is also true, to a point. In addition to the 3.8% tax on some capital gains, the PPACA contains several other taxes, including:
- A 10% tax on indoor tanning booths.
- A 0.9% tax on filers making more than $200,000 per year
- A new tax levied on insurers who market luxury-level health care plans whose premiums cost more than $10,200 for individuals or $27,500 for families.
- A 2.3% tax on sales of medical machinery
- A tax on pharmaceutical manufacturers
- A new tax on insurers, scaled to their market share
In addition to new taxes, the PPACA will also place limitations on some previous tax breaks:
- People will only be able to put $2,500 of pre-tax income into their flexible spending accounts. (This isn't really a new tax, so much as a limit on an earlier tax break).
- A reduced deduction for healthcare expenses
So yes, the PPACA will actually create a bunch of new taxes -- very few of which will directly impact middle class families. Critics argue that many of these taxes will trickle their way down onto the middle class through increased premiums, higher prices for health care, or other charges. Another argument would be that the PPACA will also pour billions of dollars into the health care system, more than balancing out the increased tax levies.
In tandem, people are also willing to pay a premium for healthier food, and investors can look into the brands and companies that provide it as anti-obesity plays with hefty potential: Whole Foods (WFM), for example, hasn't been as affected by the down economy. Its customers have remained willing to pay a premium for the pomegranate juices and choice almonds they see as part of a healthy lifestyle.
Whole Foods will report its third-quarter earnings on Wednesday after the market closes, and Goldman Sachs projects an 8.2% increase in comparable-store sales. Though there may be some weakness because of the soft labor market and weak consumer confidence, Whole Foods remains resilient.
Other potential winners: Hain Celestial (HAIN) has been big in the Greek yogurt business -- taking share from carb-heavy General Mills (GIS) -- and Dean Foods (DF) is seeing amazing growth in soy milk and organic categories.
Think healthy, get wealthy: Not a bad mantra for the years ahead.