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Here's Who’s Getting Rich off Obamacare

Rick Newman
Senior Columnist
The Exchange

For Obamacare, the technologically challenged federal healthcare program, canceled insurance policies and concerns about government privacy intrusions have been confidence-busting developments that threaten the credibility of the whole effort.

But at Econolabs, a discount medical-diagnostic service, they’ve been great for business. “We’ve been inundated with calls,” says Jack James, supervisor at the privately owned, 7-year-old firm based in Miami.  Orders at the company have spiked during the last two months, led by people losing their health insurance and others concerned about handing over their private info to the government through a federally-backed insurance plan. Since Econolabs caters to patients who pay for their own medical tests, its business model seems custom-made for the emerging system, even if some canceled policies get reinstated, as President Obama has called for. “Everybody’s grinning from ear to ear,” says James.

The rocky rollout of the Affordable Care Act has focused attention on the bug-infested federal Web site, Healthcare.gov, and the political challenges faced by Democrats who have supported the ACA. But in the healthcare industry, entrepreneurs are scrambling to cash in on the biggest upheaval in decades and a slew of new rules that will create new winners and losers. During the last three years, the S&P healthcare sector stock index has soared by 83%, considerably better than the 57% rise in the overall stock market. One factor pushing up healthcare stocks has been the expected flow of new customers under Obamacare to pharmaceutical firms such as Pfizer (PFE), Merck (MRK) and Johnson & Johnson (JNJ), and to insurers such as UnitedHealth (UNH), Aetna (AET), Cigna (CI) and Wellpoint (WLP).

But those types of big companies face risks from the complexity and uncertainty of Obamacare, especially if enrollments turn out to be lower than expected. Insurance companies are sure to get new customers, for instance, but it’s not clear whether they’ll be able to keep premiums high enough to boost profitability. Drug companies will probably fill more prescriptions, but they could also face increasing pressure to cut prices as the government’s purchasing power grows.

Other types of companies may be more clearcut winners under Obamacare. Here are five healthcare industries that should thrive under the new law:

Hospitals: The problem with hospitals today is that up to 30% percent of their patients are uninsured people who pay little or nothing, putting a huge dent in the top line. “They’ll now be able to bring that number down,” says Hardeep Walia, CEO of Motif Investing, an online brokerage that has identified 20 stocks that form an Obamacare “motif” and ought to benefit from the new law. “That will have a huge impact on the hospital business.” At the same time, occupancy should go up on account of more people having insurance. Many hospital stocks, including HCA (HCA), Universal Health Services (UHS), Tenet (THC) and Healthsouth (HLS), have already surged during the last year.

Medicaid servicers: An overlooked element of the ACA is a large expansion of Medicaid in some states, which could extend coverage to an additional 12 million people. Little-known companies such as Centene Corp. (CNC), HMS Holdings (HMSY), Molina Healthcare (MOH) and Amerigroup operate as middlemen in this field, contracting with states and caregivers to provide healthcare networks specifically for Medicaid patients. Government payments are low, but they’re also stable, and volume seems sure to increase. “Larger players all want to get into Medicaid servicing,” says Nagim Arora, who runs an Indianapolis hedge fund and publishes several investing newsletters. “Several of these servicing companies are going to get bought up,” he adds. That appeals to investors because a buyout usually boosts the stock price of the acquired firm, sometimes substantially.

Digital healthcare data providers: On TV, doctors in white frocks may still jot patient data on a paper chart, but that ancient method is rapidly being phased out in clinical settings, thanks to new rules requiring electronic record-keeping and other efforts to improve quality. Big firms such as IBM (IBM) and Oracle (ORCL) are likely to benefit, but there’s still plenty of room for startups and small firms that can help caregivers spot trends and improve outcomes. Evolent, for instance, is a San Francisco startup that sells software able to track patient data from multiple sources, so various doctors treating a single patient can each tell what the others are doing, and spot problems early. Evolent has raised more than $100 million from investors—quite a lot for a young startup--and CEO Frank Williams recently told VentureBeat the company is earning “tens of millions” of dollars.

Private healthcare exchanges: The federal Web site might be balky, but the idea of marketing health insurance through an “exchange” is a good one—which is why exchanges have developed in the private market for insurance as well. And such exchanges, operated by firms such as Aon (AON), CGI Group (GIB), Towers Watson (TW) and eHealth (EHTH), could benefit as Obamacare popularizes the idea of comparison-shopping for insurance plans at a single online marketplace. Consumers who can’t find a suitable plan on Healthcare.gov may look for better alternatives on private exchanges, for example, boosting business. It’s also possible the government could outsource some of its own functions as a middleman to private exchanges with better technical expertise.

Any business that helps lower medical costs: The onset of Obamacare will probably intensify, rather than ease, the pressure to bring down medical costs, for a variety of reasons. One of them is that people who purchase inexpensive “bronze” plans with high co-pays and deductibles will become more price-sensitive as they seek to limit their out-of-pocket medical costs. That’s why companies such as Econolabs—which has rebuffed several buyout offers, according to James—seem to have a bright future. Other companies in a position to help lower costs include generic drug makers such as Teva (TEVA), Actavis (ACT) and Mylan (MYL); pharmacy benefit managers that have the purchasing power to push down drug costs, including CVS Caremark (CVS) and Express Scripts (ESRX); and remote patient-monitoring firms such as Independa and Partners HealthCare that use technology to keep tabs on patients and their vital signs and report the info to doctors. Something good may yet emerge from Obamacare.

Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.