2012 07 Clear View's Smart Money Health Care Special


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Fee Only Financial Planner Steve Stanganelli and Clear View present a special newsletter edition focused on health care and personal finances. With the recent Supreme Court decision on the Affordable Health Care Act behind us, this issue provides some context.

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2012 07 Clear View's Smart Money Health Care Special

  1. 1. Insights on Health CareJuly 2012 Vol. No. 1 Health Care Special EditionHealth Care, a Central Election Issuein 2012 As soon as President Obama signed the Patient Protection and Affordable Care Act into law in 2010, critics and defenders of the legislation started a heated debate, which continues throughout the 2012 election season. Republicans like to point out the program’s high cost and how it will likely increase the federal deficit; Democrats argue that short-term benefits of the law have already become apparent, and long-term benefits will include affordable health care to all Americans. The image displays the percent of consumers who ranked each issue as first, second, or third most important factor in the 2012 presidential election. With the unemployment rate at 8.2% as of April 2012, it’s no wonder voters are primarily concerned with job creation. Health care is the second most important factor on the list. Personal Note from Steve Stanganelli My Core Values and value having a reliable Let’s make a plan together to second opinion or need help improve your bottom line. I strive to run my practice and my getting on track, then I look life on the core principles best forward to being a part of your summed up in Don Miguel Ruizs team. The Four Agreements: I want to help you make sense of Be Impeccable with Your Word your money. Dont Take Anything Personally Steve Stanganelli, MSF, CFP® Dont Make Assumptions Please call me and we can set up Fee Only Planner & Tax Coach Always Do Your Best a time for a no pressure chat to steve@clearviewwealthadvisors.com explore the ways that we may be 978-388-0020 If you are like me and appreciate able to work together. www.ClearViewWealthAdvisors.com this approach to life and business
  2. 2. Clear View Wealth Advisors LLC Health Care Special Edition July 2012 2 the beginning of the year because of favorable weatherMonthly Market Commentary conditions, growth has tapered off from March through May. Fortunately, auto sales in June jumped back up to 14 million units from 13.7 million in May, which was 21% above last year’s tsunami-blighted numbers, putting a stop to the downward trend. Investors continued to monitor the situation in Europe, as news on Spanish financials moved markets Housing: Housing data in June have been highly both down (poor Spanish bank audits) and up optimistic, with uniformly positive pricing data, new (support loans for Spanish banks). Up to this point, home constructions trending upwards, existing home there is still no long-term remedy for European sales data driven up at least partially by a lack of countries, with the expectation that they will continue quality inventory, and homebuilder-related financial to struggle over the next several years under austerity data continuing to rise. Morningstar economists programs, diminished growth prospects, and waning believe that the more predictive, earlier-in-the-cycle confidence. data is stronger than the more concurrent data, indicating more gains ahead. Furthermore, low rates, While economic data in the U.S. were generally weak, falling inventories, and higher sales levels should lead they were not weak enough to drive the Federal to better pricing results as well. Reserve to introduce a new program. Instead, the Fed merely extended Operation Twist until at least late Quarter-end insights: It has become more clear that 2014. Morningstar economists doubt that the program the U.S. is less dependent on exports than many other will have much more than a symbolic effect on rates, countries (U.S. exports represented only 13% of GDP given the already-low rates on long-term securities. according to 2010 data), and so a general slowing of the world economy would not drastically affect the Employment: June saw a disappointing 84,000 jobs U.S. economy. However, the U.S. economy is not the being added, mostly from sluggish private sector job same as U.S. stocks, so S&P 500 companies that have gains. While the economy actually added 815,000 substantial overseas exposure are still at risk. Stocks jobs, 731,000 were subtracted because of the seasonal with lower overseas exposure, such as utilities, adjustment factor. The good news is that in July, the communications, and health-care stocks, were among seasonal adjustment factor will add, instead of the best performers in the second quarter. The relative subtract, more than 100,000 jobs to the total number, U.S. strength showed up in country-level data as well, so that’s something to look forward to. The with U.S. indexes down only 5% near the end of the unemployment rate remained at 8.2%. second quarter, while both European and emerging- market indexes were down 10-15% for the quarter. Manufacturing: Manufacturing data in June fell Overall, consumers continued to spend, fueled sharply, mainly from a massive drop in new orders. partially by falling gasoline prices. Unfortunately, low This was the largest month-to-month decline since commodity prices were bad news for many basic October 2001, and reversed 37 straight months of material companies, as prices for their goods dropped positive growth readings. Morningstar economists while costs of production remained relatively high. believe that many firms, faced with economic uncertainty in both developed and emerging economies, may have held back on new orders. However, at this stage of the recovery, the U.S. economy can tolerate some weakness in the manufacturing sector since it only represents 11% of overall employment. Month-to-month durable goods orders jumped 1.1%, but this was not enough to offset several previous months of decline. On a year-over- year basis, growth has slowed materially, falling to 4.6% from 6.9% in the prior month. Auto: Auto sales have been a key driver in the economic recovery, and while they exploded upward in
  3. 3. Clear View Wealth Advisors LLC Health Care Special Edition July 2012 3 influx of newly insured patients into the health-careSupreme Court Upholds Health-Care system may be a positive for the health-services industry, while other components of the law, includingMandate lower Medicare payments and greater oversight of insurance premium increases, mostly mitigate such benefits. The U.S. Supreme Court upheld the individual mandate in a narrow ruling last month, clearing the For the Big Pharma group, increased demand for main hurdle for health-care reform known as the drugs as a direct result of the mandate may largely Patient Protection and Affordable Care Act offset the increased fees and rebates associated with (PPACA). While it is possible that the battle over the health-care reform. However, since costs related to fate of the health-care law will now shift to the health-care reform are front-end loaded (which started legislature, given the low probability of Republicans in 2010), and the increased demand may not likely gaining a filibuster-proof majority in the Senate, begin until 2014 (when the mandate goes into effect), Morningstar analysts believe the PPACA isn’t likely to investors sentiment toward the drug group may be repealed. improve as the tailwind of increased demand for drugs begins to materialize in 2014. Generic drug From the individual’s point of view, most Americans manufacturers may remain largely unaffected; most of will see little impact. The majority of the country these companies have broad geographic operations and receives health insurance through an employer, and generic drug pricing has been relatively unaffected by those patients are unlikely to see changes. However, the law. Americans who are uninsured or purchase insurance on their own will see a significant change. Uninsured The device side was viewed largely as a relative loser Americans will be forced to purchase minimum when the reform was passed. It is anticipated that the coverage or pay a penalty ($95 in 2014, but projected additional insured in 2014 will not significantly to increase to $695 by 2016, as per the Supreme contribute to volume because many devices are Court’s official syllabus). The government will concentrated among Medicare recipients. For implement tax credits for Americans with incomes up example, an estimated 90%-95% of pacemakers in the to 400% of the Federal Poverty Level to help ensure U.S. are implanted in Medicare patients. With the law that premiums are affordable. To facilitate the upheld, it also appears that the 2.3% medical device purchase, each state will be required to establish an excise tax will stand. insurance exchange which will make it easy to compare insurance plans. Also, starting in 2014, insurance companies will no longer be able to deny coverage to There may also be some side effects of the new patients with preexisting conditions, and will only be legislation that many people will not be too happy able to set insurance rates based on a limited number about. Health insurers may have to raise premiums, of variables, including geographic location, tobacco and employers may have to reduce what they pay in use, and age. wages and other benefits in order to continue covering the cost of health care. According to Morningstar analysts: The opinions contained herein are provided solely for informational purposes and do not constitute For the managed-care sector, the ruling may be largely investment advice offered by Morningstar. a positive, as alternatives were a lot more punitive, particularly for firms operating in the individual marketplace. On the other hand, MCOs (managed- care organizations) may continue to face margin pressure from regulatory scrutiny of premium increases, minimum medical cost ratios, and cuts to Medicare Advantage reimbursements. The other group most affected by the ruling is health- service providers, such as hospitals. The laws reduction of uncompensated care combined with an
  4. 4. Clear View Wealth Advisors LLC Health Care Special Edition July 2012 4 an amount that you think, with some degree ofThe Do-It-Yourself Health Savings certainty, youll be able to use on health-care expenses in the year ahead.Account Part 2: Supplemental Health-Care Account. Create a separate pool of liquid assets to cover any additional When deciding how much to set aside for an out-of-pocket costs that arise once youve exhausted emergency fund, there is a growing category of your FSA funds. How large should the supplemental expenses most people tend to overlook: potential out- health-care account be? Your companys out-of-pocket of-pocket health-care costs. Even if you havent opted maximum, less your FSA amount, may be a reasonable for a high-deductible health-care plan, its likely that amount if you can swing it. Unlike FSAs and the your out-of-pocket health-care costs have jumped up health-savings accounts that can be used in substantially in recent years. Not only have health-care conjunction with high-deductible health-care plans, premiums increased dramatically, but so have the co- you cant put pre-tax money into your supplemental payments and deductibles associated with many health health-care account. However, the money in your -care plans. supplemental account wont have to be spent in a single year. If you spend only a fraction of your The magnitude of those numbers and the sobering supplemental account in year 1, youd just need to top statistics about the extent to which health-care costs it back up in year 2. can derail household finances suggest that households should make sure that their emergency funds include Those who arent already funding Roth IRAs could an allowance for health-care expenses that their plans experiment with holding their health-savings account dont cover. within a Roth. The pluses: You can withdraw your Roth IRA contributions at any time and for any This is the idea behind flexible-spending accounts, reason without triggering taxes or a penalty, and if you which enable you to set aside pre-tax dollars to pay for dont end up spending your contributions to cover out-of-pocket costs not covered by your health-care health-care costs, you can withdraw the assets on a tax plan. You can use an FSA to cover everything from co -free basis during retirement. -payments to prescription expenses to health-care costs that your plan did not pick up. Yet FSAs have an Finally, be sure to track your out-of-pocket expenses important downside: If you dont use the assets youve for health care. If these costs exceed 7.5% of your put in them, the money doesnt roll over to the next adjusted gross income, you can deduct the amount year. Unless youre able to anticipate your out-of- over 7.5%. pocket costs with some level of precision (for example, you expect to be on a certain drug or see a certain specialist for the foreseeable future), the use-it-or-lose Contributions to a Roth IRA are not tax-deductible, -it risks of putting too much money into an FSA but funds grow tax-free, and can be withdrawn tax free outweigh the benefits. if assets are held for five years. A 10% federal tax penalty may apply for withdrawals prior to age 59 1/2. Please consult with a financial or tax professional for On the other hand, health-care savings accounts do advice specific to your situation. allow you to roll over your money from year to year. However, theyre only available to participants in high -deductible health-care plans, which have lower premiums and higher deductibles than traditional health plans. Given these two types of accounts, a two-part health- savings program, consisting of FSA assets plus additional assets held outside the FSA, may be worth considering. Such a two-part plan would work as follows. Part 1: Flexible Spending Account. Fund an FSA with
  5. 5. Clear View Wealth Advisors LLC Health Care Special Edition July 2012 5The Health-Care Dilemma As the 2012 election season unfolds, health care is a subject of heated debate. The Supreme Court is currently evaluating the Patient Protection and Affordable Care Act that President Obama signed in 2010, and its decisions will impact millions of Americans. Among other articles, the law requires everyone to maintain minimal health-insurance coverage or pay a penalty—a most disputed provision. The image displays the percent of consumers who have deferred care in 2011 because of cost, broken down by type of insurance. Not surprisingly, uninsured individuals were the most likely to defer care, and thus potentially place even more strain on the system later on. Perhaps mandatory health insurance for everybody would not be such a bad idea, after all. wide umbrella (such as nutrition, consumer health,Big Pharma, Big Value animal health, pharmaceutical), recent break-up announcements have allowed the market to better analyze company valuations by individual segments. Examples include Pfizer’s decision to divest its animal health and nutritional businesses in July 2011, and The pharmaceutical industry is changing before our Abbott’s plan to split into two distinct companies in eyes, but not everyone sees the same thing. With 2012. Are these firms, as a whole, worth more than change comes opportunity, and investors could be the sum of their parts? poised to reap the reward of a shakeup among some of the biggest drug makers in the world. An impending These recent changes present dislocation to the patent cliff and potential business segment break-ups industry, but there may be an opportunity to profit are among the biggest challenges facing from undervalued segments of the companies. pharmaceutical companies. According to recent Morningstar analysis, big pharma firms are currently trading at an average discount of Patent Cliff: Over the next three years “big pharma” 12.9 percent (based on company stock prices and companies (those with market capitalizations over $30 Morningstar fair value estimates of nine firms, as of billion), will face a looming patent cliff. When a drug’s January 3, 2012). Morningstar analysts believe big patent expires, competitors can replicate a similar pharma investors may be overreacting to the impact of generic drug at cheaper prices, causing revenues to “fall expiring patents in 2012, and overlooking the off a cliff.” Has the market accurately accounted for contribution of non-pharmaceutical business this looming revenue drop, or overreacted? segments. Break-Ups: While big pharma firms have historically operated various business segments under one firm-
  6. 6. Clear View Wealth Advisors LLC Health Care Special Edition July 2012 6 Unfortunately, something went out of whack in hisThis Will Only Hurt A Little Bit arm. From then on, our little Jack-in-the-Box was not his usual self, holding his arm and wincing with pain with each attempt to move it. So off we went to the local ER. Any parent can tell you that every day is an adventure. Now, in our case, there was not much to worry about. And raising a toddler or two brings with it all sorts of After a quick examination, a nurse practitioner new discoveries. Sometimes theres a new word, a new determined he had "nursemaids elbow" and with a song, a new insect or a new friend (sometimes they are few quick moves "popped" the bone into place with a one in the same). For those with infants, we know minimum of fuss or crying. that everything finds its way into your precious bundle of joys mouth ... except the food. We didnt have to worry since we are covered by employer-sponsored health insurance. The same may Well, among these many discoveries is the inevitable now be said for nearly thirty million others who have trip to the emergency room. For parents of little boys had no coverage and avoided care because of the added it would seem to be a rite of passage. It can be worry about how to pay for it. With the most frightening to both parent and child. expensive care system in the world, our companies have been at a disadvantage with places that have Well, we got through nearly three years without universal coverage. Now maybe we wont. having to make the trip. But the night before Independence Day, our Spencer was jumping between by Steve Stanganelli, CFP®, CRPC® ottoman and sofa as little boys will despite parental warnings. Short story: He landed wrong as we tried to catch him before there was a head butt collision. ©2012 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is not warranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar Market Commentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder. Steve Stanganelli, MSF, CFP® Clear View Wealth Advisors LLC steve@clearviewwealthadvisors.com Tel:978-388-0020 Fee Only Planner & Tax Coach 12 Amidon Avenue www.ClearViewWealthAdvisors.com Amesbury, Massachusetts 01913