Health Care Legislation: Our Prognosis

There is an interesting development in the health care debate.  Action by the opponents of health care reform may actually be counter-productive to their avowed interests.

Background

From my perspective, trying to help investors, the analysis of health care legislation has not been very good.  Most analysts were slow to grasp the fact that many committees had some power.  Eventually there was recognition that the bottleneck might be in the Senate, and everyone focused on the 60 votes needed for a cloture motion — cutting off a filibuster.

The Wall Street firms and the media alike have really cut back on staffing, so there are few genuine experts in political science who are working on this problem.  This makes it an opportunity for investors with some real insight.

Recent Developments

Last week the Senate passed the 60-vote hurdle on Majority Leader Reid's plan.  That will now be the subject of a full debate.

Does it mean that there are enough votes for the plan?  No.

Does it mean that the public option will be included?  No.

One of the best sources of insight into the process comes from Nebraska Senator Ben Nelson, who is not in favor of the overall legislation, but nonetheless voted with the majority to move to a full debate.  Sen. Nelson wrote an op-ed piece in the Omaha World-Herald last week, explaining his vote for last week's motion. There is a very nice analysis of the article on our sister site, ElectionStocks.  (I set the agenda for this work and always review the output.  Investors who want to know how policy-making may affect their investments should add the site to their readers.  There is plenty of information about policy initiatives and which stocks could be winners and losers.)

Some Predictions

Regular readers of "A Dash" understand that we do not advocate particular policy positions.  We have opinions, of course, but that is not our mission.  We aim to enlighten readers about the stock implications from what is likely to happen.

With that in mind, here are some of my own fearless forecasts:)

  • Some health reform legislation will pass this year.  There is a lot at stake for the President and the Congress.  Delay simply means defeat.  They will do whatever it takes.
  • The legislation will meet the test of the "minimal winning coalition" which we described here.  It will be a compromise, with whatever inducements are necessary to get the needed votes.
  • Most pundits will hate the compromise.  That is the nature of policy-making in a pluralistic society.  This is not recognized by the Wall Street analysts or Internet pundits.  Many have a political agenda, so there comments will relate to their interpretation of the merits, not the likely outcome.  Others view the wheeling and dealing that is essential to legislative action as some defect in representative government.  They need to take a class; it is covered in Poli Sci 101.  If you don't like it, find your favorite dictatorship.  It is how legislatures work in representative democracies.

The Twist

Here is the interesting part for political observers.  The Senate debate will attempt to gain a 60-vote majority, to avoid a filibuster.  Some liberals insist on the public option.  Some marginal voters want a trigger mechanism.  Others are adamant in opposing the public option since they see it as the start of a government takeover of health care.

If these opponents all hold firm, the most likely outcome at this point, the 60-vote requirement will not be met.

In this case, the Democrats might try to pass legislation through the reconciliation process, a budget procedure intended to facilitate tax cuts and spending cuts that otherwise could not get the 60-vote margin.  Sen. Reid has publicly disavowed this strategy, but the Nelson article makes clear the existence of this latent threat.

Health care legislation through reconciliation would be stripped of many specific provisions, but a public option would probably be included.  Why?  This may pass the test of a budget-cutting measure.  Other provisions would fail on a parliamentary challenge.

The Result

To understand the likely result, one has to have the reconciliation "twist" in mind.  It is possible that some  marginal voters will realize that they can have more leverage over the final bill by avoiding the reconciliation alternative.

We are going to see a few weeks of debate that will determine the final shape of the bill.

Stock Implications

So far in the process, many health care stocks have remained undervalued because of uncertainty.  Typically, they rally when chances for passage seem dim.

Our analysis is that there may be a dip as the market senses the likelihood of passage.  Then, whatever the specific outcome, there will be a rally in many of these stocks when the uncertainty is lifted.

We will go shopping in the health group, with specific sub-sectors and names in mind.

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