Healthcare Spending Uptrend: 3 Medical Stocks for Strong Growth

The improving U.S. economy is helping Americans take better care of their health now. Citizens who delayed treatments are now able to afford the costs, which will eventually push healthcare spending up. A report from PricewaterhouseCoopers’s (PwC) Health Research Institute has forecast a modest 6.8% increase in healthcare spending in 2015. Some may call the term ‘modest’ a misnomer as the forecasted growth is in stark contrast to the five-year contraction in costs the industry witnessed.

Along with the improving economy, the Patient Protection and Affordable Care Act (:PPACA) or the Affordable Care Act (:ACA) or “Obamacare” has also played significant role. Total health spending will probably trend up as more people can avail the insurance under the ACA. The aging society, hospitals acquiring more in-house physicians and costly technologies are among other factors that may drive healthcare spending upward.

Healthcare Spending

Healthcare spending is forecasted to rise 6.8% in 2015, up from the 6.5% increase expected this year. The increase may seem a bit tepid compared to double-digit growth in medical inflation recorded ahead of the economic downturn. However, this reverses the five-year contraction, thanks to economic recovery. Ceci Connolly, managing director of PwC’s Health Research Institute and the report’s co-author said: “Now that overall economy has improved and come back significantly, we see for 2015 that health spending is also loosening up.”

This is largely due to Americans being in a better position to afford medical costs. “Folks who postponed some services — some elective, some more serious — are going ahead and taking care of it,” commented Connolly.

Health Insurance Plan

The healthcare spending forecast is the difference in cost to treat patients from one year to the next. This analysis tracks the cost increase in employer-based health plan market that has 150 million people under its ambit. The forecast combines the services cost and the amount of services used.

However, the increase in healthcare spending is expected to have “little effect on employer health spending.” This is because employers usually adjust the plan offerings based on the spending trend. High-deductible plans are already rising and employers may further increase employees’ burden, i.e. the amount they are required to pay before the insurance coverage is effective. “It probably means some additional cost shifted to individuals,” Connolly said.

The net increase is thus projected at around 4.8%.

The PwC study also notes that 44% of employers are considering health plans as the only insurance option for employees for the next three years.

Affordable Care Act (:ACA)

Talking of insurance plan, the ACA should also increase healthcare spending. "Obamacare,” which was enacted in Mar 2010 and was taken as a bitter pill is now unveiling the significance for a systematic healthcare reform in the U.S. (Read: Will Obamacare Happen Smoothly?)

The World Health Organization had stated that healthcare expenditure per person in the United States is the highest in the world. Despite the large amount of money spend on health care, millions of Americans lacked health insurance coverage or were underinsured. This was mostly due to a dysfunctional system. To expand coverage, President Obama introduced drastic health care reforms, which aimed at bringing down the country’s uninsured rate.

The multi-year implementation of ACA is finally reflected in positive signs from healthcare providers (in the form of improved earnings), consumers (higher enrolments) and the market (wider coverage at lower healthcare spending). This paves the way for affordable healthcare facilities and expanded coverage for patients with pre-existing health conditions, while also bringing about 32 million uninsured citizens under the coverage umbrella.

Additionally, the ACA aims to invest in information technology and state-based exchanges to curb any fraud and manhandling of policies, hence offering complete authentic health insurance coverage in the long run.

As for the hospitals, the ACA is making the consumers stronger and the hospital industry can no longer cherry-pick their customers. (Read: Obamacare Plays: 3 Hospital Stocks to Buy)

Jason Furman of the Council of Economic Advisers said healthcare spending will most likely jump in coming quarters “as the millions of people who gained health insurance coverage during the Affordable Care Act’s first open enrollment period begin to use their new coverage.” Many Americans got their insurance at the first quarter end; thereby opening up the possibility of higher healthcare spending.

3 Medical Stocks to Witness Strong Growth

The rise in healthcare spending, if true, will increase business for hospitals, diagnostic centers and healthcare related industry. Eventually, the healthcare industry should benefit and help medical stocks be profitable bets now.

The medical stocks listed below carry either Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). If you are looking for fast growing stocks that are still seeing plenty of opportunities on the horizon, make sure to consider the following medical stocks. Not only do they have double-digit earnings growth prospect, but their impressive Zacks Rank suggests that analysts believe better days are ahead for these companies.

Biogen Idec Inc. (BIIB) is among the leading biotechnology companies. Biogen is the market leader in therapies for the treatment of multiple sclerosis (MS). Biogen is now focusing on the development of those candidates that represent higher return potential. Biologics is another area which could help drive long-term growth at the company.

Biogen also generates significant royalties from partnering agreements with other pharmaceutical and biotechnology companies. Biogen has collaborations with companies like Roche Holding AG (RHHBY), Acorda Therapeutics, Inc. (ACOR) and AbbVie Inc. (ABBV) among others.

Biogen saw EPS growth of 36.8% last year, and is looking great for this year too. The current growth estimate for this year calls for earnings-per-share growth of 30.9%. Biogen has seen estimates rise over the past two months for the current fiscal year by about 4.1%. Biogen has a Zacks Rank #2 (Buy) which further underscores the potential for outperformance in this company.

AmSurg Corp. (AMSG) is a leading operator of single-specialty practice-based ambulatory surgery centers (ASCs) in the US. At the end of Mar 2014, AmSurg operated 242 ASCs located in 35 states and the District of Columbia. Revenues are derived from facility fee charges, which are largely funded by third-party reimbursement programs such as government and private insurance.

AmSurg has made consistent progress with several quarters of double-digit sales growth. In order to pave its way into the fast-growing fragmented physician outsourcing market, AmSurg acquired Sheridan Healthcare, a prominent multi-specialty outsourced physician services provider.

AmSurg saw EPS growth of 12.6% last year, and is looking great for this year too. The current growth estimate for this year calls for earnings-per-share growth of 11.9%. AmSurg has actually seen estimates rise over the past two months for the current fiscal year by about 2.1%. AmSurg has a Zacks Rank #2 (Buy) which further underscores the potential for outperformance in this company.

Acadia Healthcare Company, Inc. (ACHC) provides inpatient behavioral health care service. Acadia Healthcare has acquired about 1,700 beds based on seven acquisitions executed in the past 15 months. The latest acquisition of Partnerships in Care (PiC) added 1,200 beds, thereby appreciating inpatient volumes. The acquired and the organic bed expansion along with smooth execution of the ACA policies are expected to drive meaningful growth for the company going forward.

Acadia Healthcare saw EPS growth of 62.1% last year, and is looking great for this year too. The current growth estimate for this year calls for earnings-per-share growth of 34.1%. Acadia Healthcare has actually seen estimates rise over the past two months for the current fiscal year by about 10.8%. Acadia Healthcare has a Zacks Rank #1 (Strong Buy) which further underscores the potential for outperformance in this company.Read the Full Research Report on BIIB
Read the Full Research Report on RHHBY
Read the Full Research Report on ACOR
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