Here are the links to the UBS Report: Download Part 1 Download Part 2

As a Canadian who strongly believes that Canada's national health insurance system is the defining positive cultural difference between this nation and any other, I frankly do not understand its critics.

I am a staunch free enterpriser too, but here is where I draw the line. I emphatically support the Canada Health Act, which provides coverage of essential diagnostic, treatment and preventive (i.e., non-cosmetic, non lifestyle oriented) services to every Canadian regardless of income level or station in life. Critics say this is free healthcare; but this is not free. It is a universal health insurance plan that all Canadians pay into. Critics also say it prevents choice, but that is a flat-out lie too.

But this article is not about Canadian healthcare or my inclination as to what other nations should be doing with respect to health insurance. It's about a UBS research report.

As I understand it, UBS is reporting that CMS (Centers for Medicare and Medicaid Services) believes that private hospitals are getting paid too much and so they want to change the payment formula in order to diminish growth in Medicaid.

Currently CMS looks at gross charges and the new formula will look at cost data instead. This happens from time to time. CMS sees that if they would have paid this way instead of the way they are paying now, they could save or could have saved $X.

What everyone has to understand is that the U.S. hospital system is not really based on free-enterprise. The free market is not setting prices...a formula is. So, what will happen in a few years? According to one former State Medicaid/Medicare analyst, probably the same thing that happened the last time CMS changed the formula.

He believes that costs will not rise as quickly for a few years until the hospitals figure out how to "game" the new system. The people that run these hospitals are not stupid.

I am not interested in the U.S. Medicaid system; I'm sure it is based on entirely different principles than is the Canadian system, which is a universal health insurance system.

But these UBS Reports do delve into the implications for investments in U.S. hospital/medical technology stocks.

My associate says:

"On first impression, it is easy to foresee that this change will set up a future accumulation zone. The hospitals with the wrong service mix (hospitals that have a larger share of services with prices that will be reduced) will be hit by this initially and therefore so will the medical technology stocks.

Sometime in the near future though (I'm sure they are already working on this) the hospitals will have figured out a way to get their reimbursements to rise again. It will be a classic opportunity for value investors. Buy when nobody wants the stocks. The hospital sector has already been taking it on the chin lately.

The non-diversified medical technology companies will be most affected (obviously), but they could also represent the greatest values at the bottom of the cycle if they have good management and can adapt.

These rules have not been put in place yet and nobody knows what rules will actually be used. So, this increases the risk premium of these stocks and therefore adds to volatility until the actual new rules are actually decided on."

As you know, the Cara 100 includes just seven (7) healthcare (GICS sector 35) stocks, and I was pushed to find seven. Had I been looking for Aggressive Growth stocks, I would have looked elsewhere.

In fact, I am already on the record saying that I believe there are excellent opportunities in the area of medical technology and services in an era where aging of the population is a demographic fact.

In any event, enjoy the UBS reports. Once again, I think the analysts did good work.

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MarketWatch has discussed this CMS decision in a recent article, which also covered one of the Cara 100.

GICS 35 Biomet, Inc. (BMET) (BMET) Financials

Here is a link to a MarketWatch report this afternoon on the evolving U.S. health insurance market, which is a different issue than covered in these UBS reports.

In the MarketWatch article, one of the Cara 100 is mentioned:

GICS 35 Aetna Inc. (AET) (AET) Financials