Rarely has there been a time where American government has become more involved in the affairs of private business across a sweeping range of industries. In particular, President Obama seems determined that the continuing saga of attempted health care reform will end under his watch with a resolution, saying the other day, "We are going to get this done. Inaction is not an option. And for those naysayers and cynics who think that this is not going to happen, don't bet against us."
Judging from the performance of health care stocks this year and the comments of executives, the threat that reform will substantially cut into profits is regarded as very possible. Lowering costs, after all, requires having some combination of fewer treatments or a lower cost per treatment -- neither of those being ideal if you're hoping to grow profits.
Following their earnings release, Johnson & Johnson (JNJ) hosted a conference call to discuss the results and the outlook for the company. The potential impact of healthcare reform on Johnson & Johnson, which generates 40 percent of its revenues from U.S.-based pharmaceutical and medical device sales, could be significant -- and it was clearly on the minds of analysts asking the company's management questions.
In responding to a question about what challenges government involvement could pose, Johnson & Johnson CFO Dominic Caruso said, "It would be fair to assume that the medical device businesses in the U.S. would probably feel some impact from the current deal, you know, that's been struck and I'm going to call it a deal with quotes -- with the current deal that's been struck with the hassociations, right?"
Hospitals have promised to cut more than $150 billion in costs over the next decade, and the implication is that they will need to pressure suppliers to lower costs to do so. Drug manufacturers have agreed to contribute $80 billion over the same time period to helping fund Medicare benefits.
Later during the call, Caruso said that the economic and political environment meant that Johnson & Johnson, while still trying to grow their business, would be more cautious moving forward. "I would say that given the uncertainty over the whole health care reform impact in the U.S. as well as outside the U.S. in terms of pressure on health care spending, and given the fact that the depth and length of the recession is still uncertain and the type of rebound we would get is still uncertain . . . we're always looking but I would say generally speaking, the risk profile because of the uncertainty is a bit higher than it has been."
James Cullen also edits and writes at CollegeAnalysts.com. He is the Vice-President of the Boston College Investment Club, which owns JNJ, but has no personal position in the stocks mentioned above.