Health Care Reform and the Stock Market: Economic Impact, Growth Opportunity and Private Sector Investors
*Nathan Dong, Columbia University
Keywords: Health care reform, health care finance, event study
The purpose of this paper aims to reveal growth potentials and to identify investment opportunities by examining the financial market reactions to the adoption of 2010 healthcare reform and its upholding by the Supreme Court in 2012.
To study the impact of healthcare reform on the healthcare sector, we examine the excess returns caused by the passage of the PPACA on March 22, 2010, and the Supreme Court’s decision to uphold the Act on June 28, 2012. Event study is a statistical method to assess stock market responses to an economy-wide event or market shock, such as the healthcare reform act. The basic idea is to find the abnormal return attributable to the reform being studied by adjusting for the return that stems from the price fluctuation of the market as a whole.
We collect sample for all U.S. healthcare-related companies in Compustat/CRSP databases. These publically traded firms include doctor clinics, drug wholesalers and retailers, hospitals, insurers, medical product manufacturers, nursing homes, pharmaceuticals, etc.
The empirical results show that financial investors appear to view the passage and upholding of the Act as good news to the hospitals, doctor clinics, and specialty outpatient facilities.
The aforementioned results suggest that most growth opportunities exist in the health care services as implicated by Ferlie et al. (1996). Furthermore, the magnitude of the abnormal return is greater for firms with higher financial leverage, management incentive pays, and institutional ownership, but smaller for those with larger assets and R&D investment.
For investors and financial institutions who are considering entering the healthcare market or regulators wants to explore how to reduce the costs of public funding to health care, this paper reveals what the general market believes where the growth opportunities are within the sector and the levels of interest that majority of institutional investors have towards them.