Insights on HealthCare

July 2012 Vol. No. 1 Health Care Special Edition

Personal Note from Steve Stanganelli

My Core Values

I strive to run my practice and mylife on the core principles bestsummed up in Don Miguel Ruiz'sThe Four Agreements:

Be Impeccable with Your Word Don't Take Anything Personally Don't Make Assumptions Always Do Your Best

If you are like me and appreciatethis approach to life and business

and value having a reliablesecond opinion or need helpgetting on track, then I lookforward to being a part of yourteam.

I want to help you make sense ofyour money.

Please call me and we can set upa time for a no pressure chat toexplore the ways that we may beable to work together.

Let’s make a plan together toimprove your bottom line.

Health Care, a Central Election Issuein 2012

As soon as President Obama signed the PatientProtection and Affordable Care Act into law in 2010,critics and defenders of the legislation started a heateddebate, which continues throughout the 2012 electionseason. Republicans like to point out the program’shigh cost and how it will likely increase the federaldeficit; Democrats argue that short-term benefits ofthe law have already become apparent, and long-termbenefits will include affordable health care to allAmericans.

The image displays the percent of consumers whoranked each issue as first, second, or third mostimportant factor in the 2012 presidential election.With the unemployment rate at 8.2% as of April 2012,it’s no wonder voters are primarily concerned with jobcreation. Health care is the second most importantfactor on the list.

Steve Stanganelli, MSF, CFP®Fee Only Planner & Tax Coach

steve@clearviewwealthadvisors.com978-388-0020www.ClearViewWealthAdvisors.com

Clear View Wealth Advisors LLC Health Care Special Edition July 2012 2

Monthly Market Commentary

Investors continued to monitor the situation inEurope, as news on Spanish financials moved marketsboth down (poor Spanish bank audits) and up(support loans for Spanish banks). Up to this point,there is still no long-term remedy for Europeancountries, with the expectation that they will continueto struggle over the next several years under austerityprograms, diminished growth prospects, and waningconfidence.

While economic data in the U.S. were generally weak,they were not weak enough to drive the FederalReserve to introduce a new program. Instead, the Fedmerely extended Operation Twist until at least late2014. Morningstar economists doubt that the programwill have much more than a symbolic effect on rates,given the already-low rates on long-term securities.

Employment: June saw a disappointing 84,000 jobsbeing added, mostly from sluggish private sector jobgains. While the economy actually added 815,000jobs, 731,000 were subtracted because of the seasonaladjustment factor. The good news is that in July, theseasonal adjustment factor will add, instead ofsubtract, more than 100,000 jobs to the total number,so that’s something to look forward to. Theunemployment rate remained at 8.2%.

Manufacturing: Manufacturing data in June fellsharply, mainly from a massive drop in new orders.This was the largest month-to-month decline sinceOctober 2001, and reversed 37 straight months ofpositive growth readings. Morningstar economistsbelieve that many firms, faced with economicuncertainty in both developed and emergingeconomies, may have held back on new orders.However, at this stage of the recovery, the U.S.economy can tolerate some weakness in themanufacturing sector since it only represents 11% ofoverall employment. Month-to-month durable goodsorders jumped 1.1%, but this was not enough to offsetseveral previous months of decline. On a year-over-year basis, growth has slowed materially, falling to4.6% from 6.9% in the prior month.

Auto: Auto sales have been a key driver in theeconomic recovery, and while they exploded upward in

the beginning of the year because of favorable weatherconditions, growth has tapered off from Marchthrough May. Fortunately, auto sales in June jumpedback up to 14 million units from 13.7 million in May,which was 21% above last year’s tsunami-blightednumbers, putting a stop to the downward trend.

Housing: Housing data in June have been highlyoptimistic, with uniformly positive pricing data, newhome constructions trending upwards, existing homesales data driven up at least partially by a lack ofquality inventory, and homebuilder-related financialdata continuing to rise. Morningstar economistsbelieve that the more predictive, earlier-in-the-cycledata is stronger than the more concurrent data,indicating more gains ahead. Furthermore, low rates,falling inventories, and higher sales levels should leadto better pricing results as well.

Quarter-end insights: It has become more clear thatthe U.S. is less dependent on exports than many othercountries (U.S. exports represented only 13% of GDPaccording to 2010 data), and so a general slowing ofthe world economy would not drastically affect theU.S. economy. However, the U.S. economy is not thesame as U.S. stocks, so S&P 500 companies that havesubstantial overseas exposure are still at risk. Stockswith lower overseas exposure, such as utilities,communications, and health-care stocks, were amongthe best performers in the second quarter. The relativeU.S. strength showed up in country-level data as well,with U.S. indexes down only 5% near the end of thesecond quarter, while both European and emerging-market indexes were down 10-15% for the quarter.Overall, consumers continued to spend, fueledpartially by falling gasoline prices. Unfortunately, lowcommodity prices were bad news for many basicmaterial companies, as prices for their goods droppedwhile costs of production remained relatively high.

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Supreme Court Upholds Health-CareMandate

The U.S. Supreme Court upheld the individualmandate in a narrow ruling last month, clearing themain hurdle for health-care reform known as thePatient Protection and Affordable Care Act(PPACA). While it is possible that the battle over thefate of the health-care law will now shift to thelegislature, given the low probability of Republicansgaining a filibuster-proof majority in the Senate,Morningstar analysts believe the PPACA isn’t likely tobe repealed.

From the individual’s point of view, most Americanswill see little impact. The majority of the countryreceives health insurance through an employer, andthose patients are unlikely to see changes. However,Americans who are uninsured or purchase insuranceon their own will see a significant change. UninsuredAmericans will be forced to purchase minimumcoverage or pay a penalty ($95 in 2014, but projectedto increase to $695 by 2016, as per the SupremeCourt’s official syllabus). The government willimplement tax credits for Americans with incomes upto 400% of the Federal Poverty Level to help ensurethat premiums are affordable. To facilitate thepurchase, each state will be required to establish aninsurance exchange which will make it easy to compareinsurance plans. Also, starting in 2014, insurancecompanies will no longer be able to deny coverage topatients with preexisting conditions, and will only beable to set insurance rates based on a limited numberof variables, including geographic location, tobaccouse, and age.

According to Morningstar analysts:

For the managed-care sector, the ruling may be largelya positive, as alternatives were a lot more punitive,particularly for firms operating in the individualmarketplace. On the other hand, MCOs (managed-care organizations) may continue to face marginpressure from regulatory scrutiny of premiumincreases, minimum medical cost ratios, and cuts toMedicare Advantage reimbursements.

The other group most affected by the ruling is health-service providers, such as hospitals. The law'sreduction of uncompensated care combined with an

influx of newly insured patients into the health-caresystem may be a positive for the health-servicesindustry, while other components of the law, includinglower Medicare payments and greater oversight ofinsurance premium increases, mostly mitigate suchbenefits.

For the Big Pharma group, increased demand fordrugs as a direct result of the mandate may largelyoffset the increased fees and rebates associated withhealth-care reform. However, since costs related tohealth-care reform are front-end loaded (which startedin 2010), and the increased demand may not likelybegin until 2014 (when the mandate goes into effect),investors' sentiment toward the drug group mayimprove as the tailwind of increased demand for drugsbegins to materialize in 2014. Generic drugmanufacturers may remain largely unaffected; most ofthese companies have broad geographic operations andgeneric drug pricing has been relatively unaffected bythe law.

The device side was viewed largely as a relative loserwhen the reform was passed. It is anticipated that theadditional insured in 2014 will not significantlycontribute to volume because many devices areconcentrated among Medicare recipients. Forexample, an estimated 90%-95% of pacemakers in theU.S. are implanted in Medicare patients. With the lawupheld, it also appears that the 2.3% medical deviceexcise tax will stand.

There may also be some side effects of the newlegislation that many people will not be too happyabout. Health insurers may have to raise premiums,and employers may have to reduce what they pay inwages and other benefits in order to continue coveringthe cost of health care.

The opinions contained herein are provided solely forinformational purposes and do not constituteinvestment advice offered by Morningstar.

Clear View Wealth Advisors LLC Health Care Special Edition July 2012 4

The Do-It-Yourself Health SavingsAccount

When deciding how much to set aside for anemergency fund, there is a growing category ofexpenses most people tend to overlook: potential out-of-pocket health-care costs. Even if you haven't optedfor a high-deductible health-care plan, it's likely thatyour out-of-pocket health-care costs have jumped upsubstantially in recent years. Not only have health-carepremiums increased dramatically, but so have the co-payments and deductibles associated with many health-care plans.

The magnitude of those numbers and the soberingstatistics about the extent to which health-care costscan derail household finances suggest that householdsshould make sure that their emergency funds includean allowance for health-care expenses that their plansdon't cover.

This is the idea behind flexible-spending accounts,which enable you to set aside pre-tax dollars to pay forout-of-pocket costs not covered by your health-careplan. You can use an FSA to cover everything from co-payments to prescription expenses to health-carecosts that your plan did not pick up. Yet FSAs have animportant downside: If you don't use the assets you'veput in them, the money doesn't roll over to the nextyear. Unless you're able to anticipate your out-of-pocket costs with some level of precision (for example,you expect to be on a certain drug or see a certainspecialist for the foreseeable future), the use-it-or-lose-it risks of putting too much money into an FSAoutweigh the benefits.

On the other hand, health-care savings accounts doallow you to roll over your money from year to year.However, they're only available to participants in high-deductible health-care plans, which have lowerpremiums and higher deductibles than traditionalhealth plans.

Given these two types of accounts, a two-part health-savings program, consisting of FSA assets plusadditional assets held outside the FSA, may be worthconsidering. Such a two-part plan would work asfollows.

Part 1: Flexible Spending Account. Fund an FSA with

an amount that you think, with some degree ofcertainty, you'll be able to use on health-care expensesin the year ahead.

Part 2: Supplemental Health-Care Account. Create aseparate pool of liquid assets to cover any additionalout-of-pocket costs that arise once you've exhaustedyour FSA funds. How large should the supplementalhealth-care account be? Your company's out-of-pocketmaximum, less your FSA amount, may be a reasonableamount if you can swing it. Unlike FSAs and thehealth-savings accounts that can be used inconjunction with high-deductible health-care plans,you can't put pre-tax money into your supplementalhealth-care account. However, the money in yoursupplemental account won't have to be spent in asingle year. If you spend only a fraction of yoursupplemental account in year 1, you'd just need to topit back up in year 2.

Those who aren't already funding Roth IRAs couldexperiment with holding their health-savings accountwithin a Roth. The pluses: You can withdraw yourRoth IRA contributions at any time and for anyreason without triggering taxes or a penalty, and if youdon't end up spending your contributions to coverhealth-care costs, you can withdraw the assets on a tax-free basis during retirement.

Finally, be sure to track your out-of-pocket expensesfor health care. If these costs exceed 7.5% of youradjusted gross income, you can deduct the amountover 7.5%.

Contributions to a Roth IRA are not tax-deductible,but funds grow tax-free, and can be withdrawn tax freeif assets are held for five years. A 10% federal taxpenalty may apply for withdrawals prior to age 59 1/2.Please consult with a financial or tax professional foradvice specific to your situation.

Clear View Wealth Advisors LLC Health Care Special Edition July 2012 5

The Health-Care Dilemma

As the 2012 election season unfolds, health care is asubject of heated debate. The Supreme Court iscurrently evaluating the Patient Protection andAffordable Care Act that President Obama signed in2010, and its decisions will impact millions ofAmericans. Among other articles, the law requireseveryone to maintain minimal health-insurancecoverage or pay a penalty—a most disputed provision.

The image displays the percent of consumers whohave deferred care in 2011 because of cost, brokendown by type of insurance. Not surprisingly, uninsuredindividuals were the most likely to defer care, and thuspotentially place even more strain on the system lateron. Perhaps mandatory health insurance for everybodywould not be such a bad idea, after all.

Big Pharma, Big Value

The pharmaceutical industry is changing before oureyes, but not everyone sees the same thing. Withchange comes opportunity, and investors could bepoised to reap the reward of a shakeup among some ofthe biggest drug makers in the world. An impendingpatent cliff and potential business segment break-upsare among the biggest challenges facingpharmaceutical companies.

Patent Cliff: Over the next three years “big pharma”companies (those with market capitalizations over $30billion), will face a looming patent cliff. When a drug’spatent expires, competitors can replicate a similargeneric drug at cheaper prices, causing revenues to “falloff a cliff.” Has the market accurately accounted forthis looming revenue drop, or overreacted?

Break-Ups: While big pharma firms have historicallyoperated various business segments under one firm-

wide umbrella (such as nutrition, consumer health,animal health, pharmaceutical), recent break-upannouncements have allowed the market to betteranalyze company valuations by individual segments.Examples include Pfizer’s decision to divest its animalhealth and nutritional businesses in July 2011, andAbbott’s plan to split into two distinct companies in2012. Are these firms, as a whole, worth more thanthe sum of their parts?

These recent changes present dislocation to theindustry, but there may be an opportunity to profitfrom undervalued segments of the companies.According to recent Morningstar analysis, big pharmafirms are currently trading at an average discount of12.9 percent (based on company stock prices andMorningstar fair value estimates of nine firms, as ofJanuary 3, 2012). Morningstar analysts believe bigpharma investors may be overreacting to the impact ofexpiring patents in 2012, and overlooking thecontribution of non-pharmaceutical businesssegments.

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This Will Only Hurt A Little Bit

Any parent can tell you that every day is an adventure.And raising a toddler or two brings with it all sorts ofnew discoveries. Sometimes there's a new word, a newsong, a new insect or a new friend (sometimes they areone in the same). For those with infants, we knowthat everything finds its way into your precious bundleof joy's mouth ... except the food.

Well, among these many discoveries is the inevitabletrip to the emergency room. For parents of little boysit would seem to be a rite of passage. It can befrightening to both parent and child.

Well, we got through nearly three years withouthaving to make the trip. But the night beforeIndependence Day, our Spencer was jumping betweenottoman and sofa as little boys will despite parentalwarnings. Short story: He landed wrong as we tried tocatch him before there was a head butt collision.

Unfortunately, something went out of whack in hisarm. From then on, our little Jack-in-the-Box was nothis usual self, holding his arm and wincing with painwith each attempt to move it. So off we went to thelocal ER.

Now, in our case, there was not much to worry about.After a quick examination, a nurse practitionerdetermined he had "nursemaid's elbow" and with afew quick moves "popped" the bone into place with aminimum of fuss or crying.

We didn't have to worry since we are covered byemployer-sponsored health insurance. The same maynow be said for nearly thirty million others who havehad no coverage and avoided care because of the addedworry about how to pay for it. With the mostexpensive care system in the world, our companieshave been at a disadvantage with places that haveuniversal coverage. Now maybe we won't.

by Steve Stanganelli, CFP®, CRPC®

©2012 Morningstar, Inc. All Rights Reserved. The information contained herein (1) is intended solely for informational purposes; (2) is proprietary to Morningstar and/or the content providers; (3) is notwarranted to be accurate, complete, or timely; and (4) does not constitute investment advice of any kind. Neither Morningstar nor the content providers are responsible for any damages or losses arisingfrom any use of this information. Past performance is no guarantee of future results. "Morningstar" and the Morningstar logo are registered trademarks of Morningstar, Inc. Morningstar MarketCommentary originally published by Robert Johnson, CFA, Director of Economic Analysis with Morningstar and has been modified for Morningstar Newsletter Builder.

Steve Stanganelli, MSF, CFP®Fee Only Planner & Tax Coach

Clear View Wealth Advisors LLC12 Amidon AvenueAmesbury, Massachusetts 01913

steve@clearviewwealthadvisors.comwww.ClearViewWealthAdvisors.com

Tel:978-388-0020