The costs of providing for a nation’s healthcare only ever move upwards.  Most costs are incurred during the last year of a patient’s life.

A hard-hearted economist would conclude that the cheapest thing to do would be to terminate people’s lives early so they never get around to being too much of a burden on the system – but that idea (which would also solve the pensions crisis) has already been turned into a film.  The Americans have tried the insurance solution (where someone is going to require expensive treatment but it is impossible to tell exactly who in advance so everyone pays a similar fee upfront) but that has not worked on two fronts : firstly not everyone can afford the insurance premium and secondly the US system encourages doctors to game the system and get rich due to insured patients being able to pay for treatments in more expensive hospitals & clinics (which rebate the doctors for sending their insured patients to them).  Other developed countries have gone the way of the government insuring everyone (general taxation revenue pays for all treatment) but this has resulted in the healthcare system becoming a black hole which sucks in vast amounts of money and nobody is really sure whether pumping extra money in results in a better service or not. 

Doctors take the Hippocratic Oath but there is another subtlety which is not overtly addressed – namely is it ethical to make a profit out of treating patients?  Never mind what the rules say, as in so many other walks of life recently (politicians & expenses, bankers playing Heads I get a big bonus and Tails the taxpayer bails out my bank), this must be about what is the right thing to do and not what it is possible to get away with within the existing rules.

This is not the same as saying doctors must be overworked & underpaid.  They are highly trained & skilled professional individuals who deserve to be paid a premium salary for their services.  However a country should not end up paying its doctors so much they end up becoming multi-millionaires (in countries such as France and the UK which fund their healthcare centrally, doctors are essentially public servants).  The States does things differently and the result leaves a lot to be desired.

Roll on the second big Democratic push in two decades to attempt to push big changes through the US healthcare system (there are 47 mln people in the States without healthcare insurance).  The last time around Hillary Clinton failed to enact her plan and achieve any real changes (although during the process Pharma shares sold off heavily on fears of what may have happened).  This time around Obama is limbering up to have another go at changing the US system.  Pharma shares are already depressed by the recent bear market but have failed to bounce back along with the market’s rebound since March.  Things could get a lot worse for Pharma shares before the ultimate shape of Obama’s plan is known (and subsequent legislation passed by the US politicians).  This is not to say that big Pharma is incapable of making healthy profits but rather that the market hates uncertainty and the sector is best avoided until there is more clarity around what the future is for the US healthcare market (which just happens to be one of the biggest & most profitable in the world).

Obama’s healthcare reform plans are likely to scare pharma shares lower and at some point a buying opportunity will appear.  Avoid the sector for now.