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WANNA MAKE A BUCK? BARRON'S SAYS YOU SHOULD
INVEST IN THE VA -- Buy shares in publicly
traded
companies that are major contractors for the VA.
Story here...
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Story below:
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Turning Khaki Into Green
By Jim McTague
HEDGE-FUND MANAGERS in search of an edge shell out six-figure payments
to Washington lobbyists who say they can provide valuable business
intelligence.
We have a smarter strategy: Dump the lobbyists and buy shares in
publicly traded companies that are major contractors for the Department
of Veterans Affairs. It has an annual budget of $86.7 billion, making it
Uncle Sam's second-largest department. Who's No. 1? The Defense
Department, at $481.4 billion.
Despite recent negative publicity about delayed care and long waits at
some VA treatment centers, the agency actually is quite efficient. It
undeniably gets some things right, including awarding contracts to
competent vendors.
In 2005, the latest year for which data are available, 13 of the top 20
contracts went to publicly traded outfits. If you had shares in the
winners of those 13 at the start of that year and held them until last
Tuesday, you would have seen this portfolio appreciate by 43%. That was
more than double the 21.4% that the S&P rose in the same span. Few
hedge-fund managers can boast a 43% return in that stretch.
McKesson (MCK1), the agency's prime pharmaceutical vendor, received $3.6
billion from the VA in 2005, according to www.federalspending.org2. That
company's contract runs for eight years. That's a nice hunk of change,
even for a corporation with $88 billion in annual revenue.
The next biggest contract in 2005, for $137.1 million, went to Germany's
Schwarz Pharma (SRZ.Germany), which supplies drugs. Northrop Grumman
(NOC3), which provides information-technology services, came in third
with a $94.9 million pact.
The VA, which is the second-largest provider of socialized medicine in
North America, behind only the Canadian government, is ahead of the
private sector in many areas, including the use of digitalized patient
records. It runs more than 154 medical centers, 900 clinics and 200
veterans centers, including facilities in Guam and the Philippines, and
so needs a seamless system to move records around. Our investment thesis
is that the private sector will emulate some of the department's
procedures to save money and, consequently, will hire some of its
contractors.
Of course, not everything is perfect within the organization. Comments
Veterans Affairs Secretary R. James Nicholson, when asked about the
reports of problems at some of his hospitals: "The VA is so big and
there are so many things going on — we see over a million patients a
week — that, tactically, on any given day, something is out of kilter.
It's the substance for some news story somewhere. But in a transcendent
way, this is a marvelous organization."
Nicholson is aggressively trying to improve care and facilities in the
wake of news stories exposing shortcomings in the treatment of returning
vets at hospitals like Walter Reed Army Medical Center in Washington,
which are run by the Department of Defense. His agency has been severely
criticized for losing track of veterans transferring from the DOD
health-care system into its hospitals. One reason: Its computers and the
Army's aren't fully compatible, a problem Nicholson has pledged to
address. He's also heading one of the task forces assigned by the
president to determine how to improve care for veterans returning from
Iraq. In the past, the private sector has copied some of the agency's
innovations. The Veterans Affairs Department developed the CAT scan and
the pacemaker and performed the first liver transplant, according to
Nicholson.
Nicholson, a West Point graduate, ex- colonel (and the winner of a
Bronze Star in Vietnam), is a former chairman of the Republican National
Committee (he returned the party to fiscal solvency) and a former
ambassador to the Vatican (the pope knighted him).
Until the storm over the quality of VA care broke, he was one of
President Bush's rare unalloyed success stories; he had never been
flayed by Congress. The VA, in fact, had received a number of
prestigious awards for high standards of care. Some of the very news
magazines that are currently blasting VA ran cover stories praising it
in 2006. In any case, the department is more than a health-care
organization: It also provides former military personnel with life
insurance, home loans and college money under the GI bill. "In addition
to being CEO of the largest health-care provider in the U.S., I run the
sixth-largest insurance company," says Nicholson. When a veteran dies,
the VA is charged with ensuring a dignified burial if none is available
through civilian means. The agency maintains more than 120 national
cemeteries in 39 states. About 600,000 ex-members of the armed forces
die each year. The agency buries more than 100,000 of them in its
cemeteries. It also supplies about 350,000 headstones for vets in
civilian cemeteries.
Health care is the largest component of the VA budget. It will cost the
agency $36.6 billion in federal fiscal year 2008, which ends on Sept. 30
of that calendar year. The VA expects to treat 5.8 million patients,
about five million of them veterans and the rest immediate family
members. That translates into close to 60 million visits a year.
By comparison, Canada's federal government spent C$98.8 billion in 2005
to cover some 30 million people, according to the Canadian Institute of
Health Information. That's about $85 billion U.S.
The VA's digitalized patient records have substantially reduced costly
mistakes, Nicholson boasts: "Twenty percent of all diagnostic tests in
private hospitals have to be repeated. Do you know why? Because they
can't locate the patient's records. We don't have that problem." When
two medical centers in Louisiana were destroyed by Hurricane Katrina,
not a single VA record was lost.
Patients in VA facilities wear electronic armbands to help safeguard
against errors in treatment, like getting the wrong drugs. Nicholson
says the VA's rate of accuracy on prescriptions since going electronic
is nearly perfect.
The agency is now embarking on a crusade to reduce drug-resistant staph
infections — a scourge that affects hospitals worldwide. A pilot project
in Pittsburgh reduced such "superbug" infections by 70%. The Veterans
Affairs chief notes that a case of drug-resistant staph costs about
$182,000, on average, to treat. The pilot plan emphasized sanitation and
sterilization. Cultures were collected from patients admitted for
surgery to determine if they were carriers.
New devices costing about $30,000 each can analyze the cultures in about
two hours, and Nicholson wants to buy them for the remaining 153
hospitals. He wouldn't disclose which device he favors. Manufacturers
include Becton Dickinson (BDX4), Cepheid (CPHD5) and Roche Holding
(RHHBY6).
Like all socialized medical systems, the VA suffers from backlogs. In
part, it's because since World War II, veterans have moved away from
older cities to places like Orlando, with fewer facilities, and opening
a new VA hospital can take years because of bureaucratic boondoggles.
An exposé by the American Legion Magazine reported that veterans
sometimes wait months to see a specialist and sometimes days to get a
hospital bed. In January, a Marine veteran of the Iraq war who couldn't
gain admission to a VA mental-health facility killed himself.
Nicholson says that 96% of primary-care
appointments and 95% of specialty-care appointments are scheduled within
30 days of a patient's desired date. However, he concedes, he must
improve service.
If he succeeds, that will be good news for former members of the armed
forces and for the companies that undoubtedly will play a role in the
effort to better serve veterans.
The Bottom Line
The VA is one of Uncle Sam's most efficient
agencies but still must make improvements to provide adequate care. That
effort should benefit patients...and the agency's contractors.
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Larry Scott --
