The document discusses the implications of the Affordable Care Act on individuals, employers, and the healthcare industry. It finds that the Act will provide coverage to around 30 million uninsured Americans through Medicaid expansion and insurance subsidies. For individuals, there will be a penalty for not obtaining coverage starting in 2014. Employers with over 50 employees will face a penalty starting in 2015 if they do not provide affordable coverage. The healthcare industry will see both costs and revenues impacted, with insurers expected to gain many new customers but also facing new regulations, and hospitals losing some funding but gaining new insured patients. Overall the impacts are viewed as manageable for most employers and positive for the healthcare sector in the long run.

1. I N V E S T M E N T S T R A T E G Y G R O U P
Investment Implic ations of the
2010 Affordable Care Act
September 2013

2. W W W. J A N N E Y. C O M2
Importance of Medicare Spending
Medicare spending was 15% of all federal outlays in 2010, and by 2020, it is projected to reach
17% of budget outlays or 4% of GDP. Controlling future Medicare costs is critical to solving
our nation’s health care problem, as the following example will illustrate: The CBO assumes
Medicare spending growth of GDP plus 1.7 percentage points in its federal budget projections.
If the annual growth in Medicare spending over 10 years were 0.7 percentage points lower than
CBO currently projects, the total 10-year spending would be reduced by about $300 billion.
That’s roughly a 4% reduction or 21% of the entire cost of ACA. Successful Medicare cost
controls have been implemented in the past, and the provisions in ACA for controlling future
costs will be critical for its success and for the long-term sustainability of the federal budget.
Background
Health care remains a critical issue for the U.S.
economy. We spent $2.8 trillion in 2011 on health
care (18% of GDP), with health care spending
outpacing GDP growth in 34 of the last 40 years.
Average per capita health care spending is $8,600
per year, having grown 8% a year since 1970—and
that’s with 16% of the population uninsured. Un-
fortunately, all of this spending has produced poor
results. The 18% of GDP spent in 2011 is the high-
est in the world, without the benefit of increased
life expectancy. In addition, other “high spenders”
like the Netherlands and France spend 12% of
GDP, insure 100% of their populations, and have
higher life expectancies than the U.S.
In summary, the U.S. has an unsustainable health
care spending and coverage problem that needs
to be addressed for the long-term health of the
economy. The Affordable Care Act (ACA) is a
major attempt to address the health care problem
facing the U.S.
Key Points and Provisions
The ACA’s main focus is to create a near-universal
system of health insurance for the country, with a
secondary aim of reducing the growth of health
care costs. About 30 million Americans—roughly
two-thirds of the nation’s uninsured—are expected
to gain coverage under the law.
This will be accomplished by making families with
incomes up to $32,500 eligible for Medicaid, and by
providing subsidies (on a sliding scale for families
making up to $117,600) toward the cost of buying
health insurance. If they don’t get insurance from
their employer next year, consumers will be directed
to buy private plans through health insurance ex-
changes run by states or the federal government.
If your employer doesn’t provide your health insur-
ance, you can use these exchanges to shop for a
2014 health plan starting this October, regardless
of your income. These marketplaces will work like
popular travel sites, and allow you to compare
plans side-by-side based on price and coverage.
Congressional Budget Office (CBO) estimates
show that the total cost of the expanded coverage
is about $1.4 trillion over the 2014–2023 period.
This will be paid for with revenue (new taxes) and
savings (primarily Medicare cuts), which the CBO
projects will actually reduce the federal budget
deficits over that period.
Summary
While the Affordable Care Act represents a major new entitlement program that will impact
many aspects of the U.S. economy, most employers should see a manageable impact. We remain
positive on our outlook for the U.S. economy and the Health Care sector as we head towards full
implementation of the law in 2014.

3. 3W W W. J A N N E Y. C O M
The numerous provisions that pay for the additional coverage have created significant angst, and will
impact the economy in a major way, as discussed below. In addition, we discuss the secondary aims of the
ACA to reduce the growth of health care costs.
Chart 1 provides a summary timeline of the law’s implementation, starting with those components
enacted this year.
Chart 1
2013
January 1
• A new 2.3% tax on medical device manufacturers starts, as does a fee on insurers to fund the cost of research that
compares the effectiveness of medical treatments.
• Medicare payroll tax on wages and self-employment income in excess of $200,000 ($250,000 joint) will increase by 0.9%.
• Medicare investment tax imposes a new 3.8% tax on investment income for higher-income taxpayers.
• The amount of money people can save in tax-sheltered flexible spending accounts is reduced to $2,500.
October 1
• Open enrollment begins for insurance policies that will take effect the following January. New insurance
exchanges are supposed to be up and running for every state, so that people can shop for insurance plans and apply for tax
subsidies toward the cost of premiums—or enroll in Medicaid in states that choose to expand their programs.
2014
January 1
• The biggest insurance market changes take effect. Plans can have no lifetime or annual limits, and must be sold to
everyone regardless of their medical history—without variation of rates based on gender, and only limited differences based
on age. Plans must cover a basic package of benefits and must cover a set proportion of consumers’ expenses. New taxes
on plans also take effect.
• Individual Mandate. Most individuals must have health coverage from this date or pay a penalty, which starts at $95 a
year or up to 1% of a person’s income, whichever is greater.
2015
January 1
• The penalty for not having insurance increases to $325 for an adult, or 2% of taxable household income.
• Employer Mandate - Employers with at least 50 full-time workers have to offer an affordable, set level of
insurance from this date, or pay a penalty starting at $2,000 per worker. Employers also have to pay fees, estimated
at around $63 for each person covered, into a pool designed to compensate insurers who end up taking on more risky
customers. They can offer some specific discounts to employees who participate in wellness programs. Firms with more
than 200 employees have to automatically enroll workers in insurance, although employees can choose to opt out of
coverage.
2016
January 1
• The penalty for not having insurance increases to $695 for an adult, or 2.5% of taxable household income.
• States can form arrangements to combine their marketplaces with other states.
2017
January 1
• States can expand health insurance exchanges to allow large employers to purchase insurance for their employees there, as
well as make other changes to their local marketplaces.
2018
January 1 • High-cost health care plans become subject to a 40% excise tax.
Impact on Individuals
The primary objective of the law is to provide afford-
able access to health care for everyone. There will be
no change if an individual receives employer cover-
age. In the absence of employer coverage, individuals
will obtain insurance on exchanges, or through
government programs (Medicaid or Medicare). If
an individual doesn’t obtain health care coverage
by 2014, they will be required to pay a tax of: $95 in
2014; $325 in 2015; $695 or up to 2.5% of income
in 2016; and dollar amounts that are indexed post-
2016. This is known as the “individual mandate,” and
a recent Urban Institute report determined that it “is
clearly a central component of the law and its antici-
pated coverage expansion” (see Chart 2).
Chart 2: Share of the Non-Elderly who are
Uninsured Today Compared with Reform
(Source: Urban Institute Analysis)
0
5
10
15
20
No ACA ACA
ACA
Without
Employer
Mandate
ACA
Without
Individual
Mandate
Impact on Individuals, Employers, and Health Care Industry

4. W W W. J A N N E Y. C O M4
Impact on Employers
There will be minimal impact on employers if they
continue to offer coverage. Beginning in 2015, if
employers don’t offer coverage, they will be as-
sessed a penalty of at least $2,000 per employee.
This is known as the “employer mandate.” Compa-
nies with less than 50 full-time workers (most small
employers) are exempt from this requirement.
This employer mandate has been a source of major
controversy for the new law, and its implementa-
tion has been delayed until 2015. Despite the
controversy around ACA and employment, the
CBO estimates that 2 to 5 million fewer people
will obtain coverage through their employer than
would have been the case under prior law. This
represents less than 3% of the 160 million people
with employer coverage.
More than 95% of large firms already offer insur-
ance, implying that a small pool of firms would
need to alter their current benefit offering to com-
ply with the employer mandate. Even before the
law was passed, most large firms already faced IRS
rules that prevented them from denying available
health benefits to full-time workers. Importantly,
the new law leaves the major tax incentives in place
for employers and employees to obtain coverage
through their employer.
Companies in low-wage or significant part-time
employment industries such as restaurants, retail,
and agriculture have cited difficulties posed by the
law’s requirements, and there is concern that these
industries will shift employees to part-time work to
avoid the new law’s requirements. While some of
these firms may be interested in moving full-time
employees into exchanges, since they would get
subsidies from the government, recent San Fran-
cisco Fed and UC Berkeley research suggests that
the ultimate increase in the incidence of part-time
work when the ACA provisions are fully imple-
mented is likely to be small—a 1–2% increase or
less. Chart 2 (above) also shows the Urban Insti-
tute’s finding of a negligible impact if the employer
mandate were eliminated altogether.
Numerous other studies support the general con-
clusions discussed above, including the experience
of employer mandates implemented in Massachu-
setts and Hawaii.
Impact on Health Care Industry
While the new law impacts all aspects of the Health
Care sector, our Investment Strategy Group (ISG)
continues to have a favorable view on the sector.
Although the pace of growth may be slowed by new
reforms, that should be outweighed by the positive
impact on valuations from a lifting of health care
reform uncertainty. There is also pent-up demand
due to the weak economy, which will be augmented
by the newly-insured 30 million patients.
Managed Health Care: The ACA expands health
insurers’ pool of customers, rewrites many of the
rules that govern their business, imposes new limits
on how they spend premium dollars, and exposes
them to new scrutiny.
The biggest benefit to the industry is the expected
expansion of the insured. The CBO projects that 7
million new customers in 2014 will purchase plans
from private insurers through the exchanges (new
online marketplaces). This number is projected to
grow to 25 million in 2018.
There are some risks to insurers. They will no longer
be able to refuse coverage based on a customer’s
pre-existing condition, or set premiums based on
health history. They will have less room to vary rates,
must include a set range of health benefits in plans,
must cover preventative care services without any
out-of-pocket consumer costs, must allow parents
to include adult children on their plans up to their
26th birthday, and cannot cap payouts.
The ACA also limits insurers’ ability to vary prices
based on age. Their premium increases are subject
to review, and they have a requirement (already in
effect) to spend at least 80% of premiums from in-
dividuals and small companies—85% of those from
big employers, on health-related costs. Insurers
also face a fee to fund the costs of research com-
paring the effectiveness of medical treatments.
ISG is overweight on health insurers, driven by stable
pricing power and a falling cost structure that is enhanc-
ing profitability. Meanwhile, Wall Street analysts remain
overly bearish on the group.

5. 5W W W. J A N N E Y. C O M
Health Care Facilities: The major good news is that
hospitals will have 30 million new paying custom-
ers—many of whom already show up for uncovered
care in emergency rooms. This will come at the ex-
pense of losing some federal funds for treating large
numbers of uninsured patients. ACA will cut pay-
ments to hospitals by $155 billion by 2019, and will
impose penalties for things like readmissions—which
ultimately could result in 3% cuts in payments to
hospitals with poor performance. Since spending on
hospital care will account for nearly one-third of the
$2.9 trillion in 2013 U.S. health spending, hospitals
are at the center of the efforts to rethink health care.
ISG remains neutral on health care facilities and expects
valuations to remain volatile ahead of the implementa-
tion of health care reform in 2014, as most industry
participants have seen solid share price appreciation since
the start of 2012.
Pharmaceuticals: Pharmaceutical companies have
already cut by 50% the drug prices that the Medi-
care Part D “doughnut hole” caused for 900,000
patients. PricewaterhouseCoopers estimates total
costs of $140 billion over a decade for the industry,
due to other fees and price cuts from the ACA.
While we view Pharmaceuticals as a core portfolio hold-
ing, ISG remains concerned about the group’s demanding
valuation in light of a lack of productivity growth and
generic competition.
Health Care Equipment: Device companies face a
2.3% tax on their U.S. sales, to help cover the costs
of the ACA. The tax will cost the industry about
$29 billion by 2022. However, the industry will
benefit from additional sales due to the 30 million
newly insured.
ISG remains overweight on health care equipment manu-
facturers. Outlays on medical equipment are picking up
speed, which should sustain recent and impressive top-line
industry growth—the opposite of what Wall Street analysts
are expecting. A re-rating in sales and productivity growth
expectations would be a strong catalyst to unlock latent
value in this group.
Drug Retailers: Drug retailers should see signifi-
cant increases in prescription volumes, as nearly
30 million people are expected to gain health
care coverage under the ACA.
ISG remains overweight in drug retailers, and we see
many other positives. The industry is experiencing pric-
ing power while its wage costs and capacity expansion
are under control—which will help profitability. Valua-
tion is favorable, and Wall Street expectations are low.
Chart 3 below highlights companies that ISG
believes are well-positioned for implementation of
the ACA.
Chart 3
Company Symbol P/E - Forward Div Yield Description Coverage
Covidien Plc COV 16.4 1.7 Diversified product line with solid growth opportunities. S&P
Medtronic Inc. MDT 13.9 2.0 Diverse product line and strong cash flow. S&P / CS*
Zimmer Holdings, Inc. ZMH 13.8 1.0 Strong cash flow and balance sheet. S&P / CS
UnitedHealth Group UNH 13.3 1.3 Leading market position with product diversity. S&P / CS
Johnson & Johnson JNJ 15.9 2.9 AAA-rated blue chip with a solid dividend. S&P / CS
Merck & Co. Inc. MRK 13.7 3.6 Full product pipeline with valuation and dividend support. S&P
Mylan Inc. MYL 12.5 Nil Leading manufacturer of generics with valuation support. S&P
Pfizer Inc. PFE 13.1 3.3
World’s largest pharma company with valuation and dividend
support, solid pipeline, and exposure to emerging markets.
S&P
CVS Caremark Corp. CVS 14.9 1.4 Largest pharmacy health care provider in U.S. S&P / CS
Walgreen Co. WAG 15.8 2.3 Largest U.S. retail drug chain based on revenues. S&P / CS
Vanguard
Healthcare ETF
VHT — — Cap-weighted basket of 293 companies offers broad exposure. —
iShares Medical
Devices
IHI — — Cap-weighted basket of 40 manufacturers and distributors. —
iShares Healthcare
Providers
IHF — — Cap-weighted basket of 40 health care providers. —
iShares
Pharmaceuticals
IHE — — Cap-weighted basket of 36 pharmaceutical companies. —
* Credit Suisse
For more information, please contact your Janney Financial Advisor.

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