Health care
GEOFF COLVIN: You'd never guess it by listening to the pundits, but the top concern of American voters isn't Iraq, and in some polls it isn't even the economy. It's health care. Two years ago just 5 percent of Americans said health care was one of the country's most important problems. Last year that percentage more than doubled, to 11 percent, and this year it nearly doubled again, to 19 percent. Now health care could be the No. 1 issue in this Presidential campaign, which makes it an important part of PBS's By the People 2004 election coverage. As the debate heats up, what will happen to your health care -- and to health care industry investments?
Karen Davis is president of the Commonwealth Fund, a philanthropic organization that researches health care issues; she joins us from New York. Kris Jenner manages the market-beating T. Rowe Price Health Sciences Fund; he's also a doctor. And Brian Belski is a market strategist with Piper Jaffray in Minneapolis, covering the health care sector among others.
Karen Davis, why are Americans suddenly so much more concerned about health care than they were just a year or two ago?
KAREN DAVIS: Well, it is a top concern of Americans, and I think the big driving force is the increase in health care costs. Health care costs are going up about 10 percent a year. That's faster than in over a decade. And health insurance premiums are going up about 15 percent a year. So American patients are concerned that they're simply not going to be able to afford health care if they need it.
COLVIN: Why are those costs going up so fast?
DAVIS: Well, there are a number of factors behind it. Certainly there's been a major increase in technology, which we all value and want to see happen. But some of it is simply a result of a very complex, fragmented system. So even administrative costs are going up very fast.
But I think the real driver behind American concerns has to do with a slowdown in the economy. As people lose jobs, they lose their health insurance coverage. About one in three Americans either doesn't have health insurance or they're likely to lose it soon, or it simply doesn't cover enough of their bills to provide them with good protection.
COLVIN: We certainly see more and more employers cutting or at least reducing the health coverage they give to their employees.
DAVIS: That's certainly right.
COLVIN: Yeah, it's a big thing. Kris Jenner, you take a big picture view of this, as well as picking companies for your fund. Why do you think people are so much more worried about this than they used to be?
KRIS JENNER: Well, I think you have to think about health care a little bit different than other areas in our economy. For example, if I want a new car and can't afford it, I think about working harder or I do without. But health care is so vital that if you can't afford it, that's where the tension resides, and I think it's going to be a tension that's only going to increase in time.
COLVIN: And that's where the political pressure comes from to do something about it, right? We don't feel any need to make sure everybody can afford a Mercedes-Benz, but we do feel a political need to make sure that everyone can afford at least some minimally acceptable level of health care.
JENNER: That's right, absolutely. And I think that is the construct that we're talking about.
COLVIN: And a lot is going to happen. Mr. Belski, amid all this potential turmoil, you like health care stocks. You're telling investors to overweight them in their portfolios. How come?
BELSKI: We do, Geoff. We think earnings growth remains very strong. Valuations have contracted to the point where we haven't seen in the last few years, and I think part of that is because health care, in particular, underperformed the market with such a drastic rate last year that it provides a good opportunity for growth and valuation at current levels.
Plus, last year's rally was really defined by low-quality, very risky type stocks. And in our opinion, that's the complete inverse in health care. You have a very high quality, high standard of fundamentals within health care, and we believe institutional investors will be rotating into health care in 2004 as a result.
COLVIN: Karen Davis, in a nutshell, what's the difference between President Bush's approach to this issue and the approaches of the main Democratic candidates?
DAVIS: Well, President Bush would give people with incomes of about $15,000 a $1,000 tax credit to buy individual health insurance, and that would help about 4 million people. But there are about 44 million people without any health insurance coverage. And so most of the Democratic proposals take a more comprehensive approach, but they build on current sources of group coverage, they expand employer coverage, they open up the plan that covers members of Congress to small businesses, they let older adults buy into Medicare early. So it's a mixed public-private strategy, but it builds on programs that are working now.
COLVIN: Kris Jenner, many people don't realize that some of America's largest corporations are now calling for some kind of universal health care coverage. The National Coalition on Health care is calling for this. It includes AT&T, General Electric, Alcoa. Former Senator Bob Dole has called for it. Is some kind of universal coverage, in your view, becoming inevitable?
JENNER: I don't think so. I think that that decision, at least it's my opinion, that that decision was put before the electorate several years ago, and I think that there...
COLVIN: Are you talking about 1993 when the Clintons were talking about it?
JENNER: I am, and I think that there is a view that we need a market-based mechanism for the distribution of health care. And I do think there is a growing understanding between payers and innovation, and so that if we have a non-market-based mechanism that doesn't allow for the ample reward of truly innovative products, we're not going to have innovation in health care. And I think that's fundamentally what people better understand today, and that's what we're seeking as many of these baby boomers are going to be moving into a period where they want better therapies, safer, more efficacious for the many diseases for which we don't have good therapies. The one way that we're going to get that is to reward innovation, and I think there's a good linkage between rewards and innovation and how that would not likely occur in a single-payer system.
COLVIN: Karen Davis, this is an absolutely critical issue. Are we going to have a primarily market-based system, or are we going to have a primarily government-directed system?
DAVIS: Well, I think we are going to have action on this, because it's an increasingly serious problem for Americans. They simply aren't able to get health care when they need it. In fact, we know that about 18,000 people die every year as a result of not getting care early on because they can't afford it.
But I don't think we'll have a plan that's one-size-fits-all, so I do agree it won't be a single-payer system. But I think we'll build on what's now working, but we'll expand it in a major way to really make health insurance affordable, both for businesses and for the people who work for them.
COLVIN: The country's essentially split evenly between Democrats and Republicans now. If either President Bush or the Democratic nominee, whoever it may be, were to offer a really big, bold health care initiative this summer, do you think that could be the deciding factor in who the next president will be?
DAVIS: Well, I think we certainly see it up there with a concern about jobs as the top one or two concerns of the American people. And so I think people are going to be looking at the candidates, looking at the proposals they have and see whether it's up to the task to really make health care affordable and accessible to them when they need it.
COLVIN: Brian Belski, you favor the sector. What companies specifically do you like right now?
BELSKI: We like some of the larger-cap companies, some of the household names like Merck, Johnson & Johnson, and UnitedHealth.
UnitedHealth continues to show very strong margin and EBITDA expansion, whereas Johnson & Johnson is one of those bellwether type of conglomerates that I think institutional investors will rotate into if and when we see some softness in the market. And Merck, in general, has been a little controversial due to the lack of growth vision going forward. However, we in our models are starting to see a pickup in sales growth and margin expansion at attractive valuations that we haven't seen in a few years in that stock.
COLVIN: Kris Jenner, you have been doing very well in your fund, not heavy on big-cap companies, mostly small and medium. Who do you like now?
JENNER: Well, I'll just point out another family household name, which is Pfizer, that actually fits in with what Brian was just saying, and is of interest to Karen in that Pfizer is doing some pilot programs where they actually are looking, as opposed to single diseases, they're looking at disease management.
So, for example, someone who has high blood pressure should also be on a drug that lowers cholesterol, and they have a program down in Florida that they've just finished the first year, and they did see the pharmaceutical consumption go up, but they also saved the state of Florida somewhere between $30 and $40 million.
And so I would put forward a company like Pfizer that is really trying to look out into the future and say how do we need to look at this issue in terms of not just looking at an individual with hypertension, but looking at disease management, and that actually is relevant to the discussion we've been having.
COLVIN: It is for sure. You like the stock?
JENNER: I like Pfizer. And in the smaller area, we do see this inevitable tension and some sort of societal referendum. And one of the themes of our fund is to only invest in those companies who are bringing products to the market that make a real difference in a patient's life, and either they cure the disease altogether or minimize the pain and suffering with the disease.
And the pharmaceutical business model is still very attractive, and if you can find those situations in a small or mid-cap company, there is tremendous rewards. Gilead Sciences specifically would be an example where Viread, the leading drug for the treatment of HIV AIDS, is really changing the paradigm of HIV therapy, and the shareholders in that company have been rewarded accordingly.
COLVIN: Brian Belski, this talk about pharmaceutical companies reminds one that a lot of older Americans are paying huge amounts monthly for their prescription drugs, and many of them are actually resentful of big pharmaceutical companies because they are among the most profitable companies in the country. Is the resentment justified, and is it going to lead to trouble politically for the companies?
BELSKI: I don't think it's justified. I mean I think it's been such a hot-stove issue and I think the press has been able to jump all over it. I think what you're going to see in pharmaceuticals, not just this year but over the next two to three years, is I think you will most likely see additional business combinations and M&A activity. This type of scenario and timeframe, with big-cap pharma in particular, really reminds me of the early '90s when we were talking about similar type of situations with health care legislation. You brought it up a little before. So I think we're going to enter one of those heavy M&A activity type of situations that could alleviate some of the fears that maybe some Mom & Pop Americans have regarding big-cap drug companies.
COLVIN: Karen Davis, are Americans anywhere near getting realistic about the tradeoffs, the costs of fixing the health care system? I ask this, because I was talking to a hospital administrator not long ago who said most patients still have the attitude: I want the very best possible care, immediately, for free.
DAVIS: Well, I think Americans do want the best health care, but I think we're not getting the best health care, and there's a lot of waste and inefficiency in the health care system that really could be attacked. Certainly I think that disease management or better care management for people with chronic conditions can yield savings, reduce hospitalization, whether that's pharmaceutical or using nurses to really monitor patients' conditions. But what we're finding in work that we're supporting is there's an awful lot of waste and duplication in the health care system. People whose records aren't available when they're needed, so doctors repeat tests. We really haven't moved into the modern age with information technology in health care. We know there are a lot of medical errors, and that's not only bad for patients, it's bad for health care costs because people wind up with infections, staying in the hospital longer. So I think there's going to be a lot of pressure to get better performance out of the health care system, to use information technology.
COLVIN: Kris Jenner, you have a view on this.
JENNER: Well, I was just going to say that your viewers may be interested in a company like WebMD.
And I think Karen's right. I think that the medical community is 10 to 15 years behind in terms of electronic automation, for example, where the financial services industry is. And a company like WebMD is actually a long-term play on that very thesis.
COLVIN: Useful information. Thanks so much, Kris Jenner, Karen Davis, Brian Belski.
Jobs and staffing firms
KAREN GIBBS: From health care to another hot button issue: Jobs. The unemployment rate fell to 5.6 percent in January, but the economy produced only 112,000 jobs; a disappointing number for the 26th month of an economic recovery. But there is a silver lining in the dark labor cloud -- temporary workers and the firms that place them are booming.
FORTUNE's Bethany McLean had been looking into this trend and she joins us from New York. Well, Bethany, what about this debate on the jobs market? Are we seeing a recovery, or is it a jobless recovery?
BETHANY McLEAN: It's a really interesting debate right now that's raging on Wall Street. You have some people saying it really is different this time because the lack of jobs creation given the strength of the economic boom is just absolutely unprecedented. You have other people saying, well, at some point, especially if growth and productivity slows down, you have to see a resurgence in hiring. Firms will simply need more workers. But I think we're a long way from knowing the answer to that debate, and it will have really important ramifications for all of us going forward.
GIBBS: But what we have seen is a boom in temporary hiring. What's behind that trend?
McLEAN: Well, you normally do see a pick up in temporary hiring some three to six months before you see a pickup in more permanent hiring. So people have taken that actually as a somewhat bullish sign, that there may be growth in more permanent jobs on the way. But you really have some fundamental things at work here as well. You have employers who are scared of high benefit costs, worried that the upturn won't last, and they're reluctant to take on full-time workers as a result. So a temporary labor force is a more flexible labor force. Should the economic recovery dissipate, they can simply let people go.
GIBBS: And what companies are benefiting from this trend toward temporary workers?
McLEAN: Well, a couple you've seen, Manpower has seen its stock soar dramatically over the past 52 months. The same is true of Robert Half.
In fact, all across the companies that do business with hiring, you've seen just soaring stocks. And some of this has been a little bit of benefit from this trend, but it's mostly been in anticipation of future benefits to come.
GIBBS: Well, what happens if the economy does turn down and you have no need for temporary workers or permanent workers, or if the economy picks up so much that permanent hiring picks up?
McLEAN: Well, the first scenario would be not good for the stocks of any of these companies. It wouldn't be good for any of us. It wouldn't be good for the stock market in general.
And the second trend is not necessarily bad for firms that specialize in temporary hiring. Bulls argue that you have a long-term, secular move toward increased use of temporary hiring. For example, at the beginning of the last boom, the temporary work force was about 1 percent of the total, back in 1990. By the end of 2000, it was about 2 percent of the total. So even though you had huge growth in permanent jobs, you also had huge growth in the temporary work force. And what bulls on these stocks, like Manpower and Robert Half, argue is that that's really a long-term trend. It's not going down back to 1 percent, it's going up to 3 percent over the course of the next decade. And that should really just spur strong demands for the services these firms provide.
GIBBS: How about the move toward outsourcing, particularly offshore outsourcing, and the strength in productivity? How does that impact companies that are benefiting from this move?
McLEAN: Well, it's a really interesting question, and it's another part of the debate about jobs, which is, is it different this time because of the strong move toward outsourcing jobs in areas like China and India? And is it different this time because of the huge productivity gains in the U.S.? And does that mean that perhaps there may not be a resurgence on the jobs front like we've seen before? It's going to be interesting how that plays out. On the one hand, you have people making the argument that that changes everything and this is going to remain a jobless recovery, if it can be such a thing. On the other end of the debate, you have people saying that we'll be in a workforce shortage that's worse than the one we saw in the late 1990s. It's really a fascinating source of disagreement.
GIBBS: And, Bethany, conventional wisdom usually has temporary workers as blue-collar, entry level. But aren't we seeing more white collar management positions now?
McLEAN: Absolutely. Robert Half, for example, specializes mostly in more white collar positions. And some of that is by choice. People want a more flexible lifestyle. Some of that is not by choice. People are just desperate to find a job and they'll take anything with the hopes that it will turn into a permanent position.
GIBBS: So correct me if I'm wrong, but what I think I'm hearing from you is that the outlook for these firms that provide temporary workers is pretty good. Bethany McLean, thanks for joining us.
McLEAN: The outlook does seem to be pretty good. I think I'd mention two caveats to that. One would be if there is indeed a continued jobless recovery here and we don't see that boom in jobs that everybody is expecting. That's not going to bode well for these firms. The second is simply in terms of the firms' stock prices. You've seen gigantic stock price gains in these firms in anticipation of benefits to come and gains to come. And I think some people would argue that the stocks have gotten a little bit ahead of reality.
GIBBS: All right. Bethany McLean, thanks for joining us.
McLEAN: Thank you.
Political advertising
GIBBS: If you live anywhere near a primary state, you can't pick up newspaper, turn on the radio or switch on the TV with seeing a political ad:
Wesley Clark ad: It's time we had a president who worried less about his future and more about yours.
Howard Dean ad: I opposed the war in Iraq and I'm against spending another $87 billion there.
John Edwards ad: As president, that's what I'll fight for every day -- an America that works for all of us.
John Kerry ad: He (Kerry) wants better for America. I'm John Kerry and I approve of this message.
Well, don't be fooled. These ads are not just about new ideas and warm and fuzzy photo ops, it's about big money. Candidates are projected to spend a record $270 billion this elections cycle. So with all this money flowing into the system, whose pockets are getting lined? Money manager and Wall $treet Week with FORTUNE's political contributor Michael Farr has been looking into the issue for us.
Mike, weren't reforms like McCain/Feingold supposed to take some of this money out of campaigning?
FARR: They were, Karen, and in fact they have. About a half a billion dollars is gone in ad spending in this election cycle that was there in 2002 and in the year 2000. Most of that money was soft money that was channeled through the political parties. But don't think that just because that money is gone that represented mostly in negative ads that all the negative ads are gone. They're still out there.
GIBBS: Well, let's talk about the negative ads. In fact, let's take a look at one right now:
What do you think of Howard Dean's plan to raise taxes on families by $1,900 a year?
What do I think? Well I think Howard Dean should take his tax-hiking, government-expanding, latte-drinking, sushi-eating, Volvo-driving, New York Times-reading...
...body-piercing, Hollywood-loving, left-wing freak show back to Vermont where it belongs.
Got it?
Club for Growth PAC is responsible for the content of this advertising.
Those are pretty strong words, and that's even saying me, that I'm a latte drinker and New York Times reader. What about negative ads?
FARR: Sushi-eating, Volvo-driving...
GIBBS: I drive a Jeep.
FARR: We've got this ad to drive a Volvo and read The New York Times.
GIBBS: Doesn't Ford own Volvo now?
FARR: You saw that it was not paid for by the Dean campaign. You saw also in the first group an element of the new McCain/Feingold bill. There's a provision in that bill that I really do like called the "stand by your ad" provision, and it's where John Kerry came on and said "I'm John Kerry, and I approve of this ad." Good for you, John Kerry, and by law you had to say that. These special interest groups that can run negative ads don't. So the political ads that are paid for by the politicians themselves and the candidates themselves should be less acerbic I think this year, but there will still be plenty of acerbic ads out there, as we've just seen.
GIBBS: And plenty of ads, period. Everywhere you look, you're getting bombarded with, almost over saturated with it. Where do all these ads go?
FARR: Well, first I think that half a billion that's missing is being made up for suddenly in hard dollars. The money is being raised, and it will be spent. The ads are going pretty much to television stations and television groups that are number one or number two in news, in their region, and where the stations are pretty much located along the primary and caucus route. Meaning that if you're in a primary or caucus sort of a state, you're going to see more dollars spent at your station than if you're not, if you're later in the cycle. So television is where the money goes, 80 percent of these dollars find their way to television, and to the number one or number two news station in those demographics.
GIBBS: Well, what companies are poised to benefit? Who wins?
FARR: According to Jim Boyle, who is the media analyst at Wachovia Securities, he recommends two companies. Jim likes Hearst-Argyle Television.
It's a $2.2 billion company, and they meet both criteria. 75 percent of their stations in their group are number one or number two in news, and 75 percent of their revenues come from stations that are located along that primary or caucus track.
The second is a smaller company called Gray Television.
Gray Television is around $680 million in market cap, so about a third of the size. 80 percent of their stations are number one in news, so that is higher on our list of criteria. And number two, 50 percent of their revenues -- so a smaller number than Hearst-Argyle -- 50 percent of their revenues come from stations along that primary caucus track. So those are two names that should benefit very well from spending, ad spending, political ad spending this Presidential election cycle.
GIBBS: What happens if the Democratic field narrows to just one man, John Kerry? Does the ad spending dry up?
FARR: Historically, it doesn't. Historically, the focus then goes between Bush and Kerry, and we see just as many dollars come in. Television spending reaching the people through that wonderful screen still has been the most effective way of reaching voters. We've seen political ad spending pick up an average of 60 percent per election cycle since the Nixon administration. Since Reagan, it's about 40 percent, something over 40 percent per election cycle over the past four election cycles. So this is a real growth industry, political ad spending. The analysts I talked to in New York said increased ad spending is the one promise we can count on our politicians to keep.
GIBBS: Michael, what about after the elections? Are these companies still worth owning?
FARR: According to the analysts, yes. We're going to see, I think, a consolidation in the industry. There is legislation -- well, it's not really pending, it's been approved. We're waiting for it to be enacted -- where major media companies are going to be able to own two or three stations in the same market. That's been prohibited before. And therefore you're going to see certain takeovers and acquisitions begin to support the prices of these stations. And the private transactions occur at almost twice the price of the public transactions.
GIBBS: And where do the big media players fall in this game?
FARR: I think the big media players continue to benefit, certainly. It's going to be an additional $2 billion, $1 billion from political ad spending on that quadrennial cycle. The second is from the other quadrennial cycle of the Olympics. So that's $2 billion more being spent. It's not all going to these stations. We know that the news stations will benefit most from the political ads, but the Olympics will benefit most all.
GIBBS: All right. Michael Farr, thank you very much for joining us.
FARR: Thank you.
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