With Congress in recess, many wonder if on health care reform will go through. What are your thoughts?

It’s likely that some form of health care reform will pass. President Obama has made it a key piece of his legislative proposals; reform becomes less likely if a bill isn’t approved this year.

The administration appears more willing to compromise on key points of contention–namely, a proposed public plan that would compete with private insurers. For the first time the administration has tempered its insistence that such a public plan is essential to health care reform.

That should hearten Republicans and industry lobbyists who regard such proposals as anathema. If the White House is willing to compromise on that sticking point, it’s much more likely that we’ll see a bipartisan proposal go through this year.

One compromise that’s been floated in the Senate Finance Committee involves co-ops that would function as independent entities administered by the government. Set up on a regional or state-by-state basis, these co-ops would compete separately with private insurance companies.

Such a solution would involve concessions to both sides and foster competition that might be lost with a single government entity.

How much of a challenge would a public option pose to insurers?

The devil’s in the details. If there were a public plan option, how it works would determine its impact on insurers.

If pricing under the public plan were based on Medicare fee schedules, which are generally priced at a significant discount to commercial insurance, then it would be a very significant competitor because it could undercut companies that are pricing at market rates.

If a public option were allowed to set lower prices and lower reimbursements to physicians and hospital providers, then its costs would be lower and patients would likely switch to the public plan.

Not surprisingly, insurers have fought hard to prevent such a plan from gaining approval.

What if the program required everyone to carry some form of health insurance?

There are a couple of issues at play here. One of the key objectives of health care reform is to improve access to health care. Universal insurance that covers the 47 million uninsured would be ideal. But without an individual mandate, a form of adverse selection could ensue. Those who are sick would opt for the plan, whereas those who are healthy might decide not to buy insurance. An individual mandate that requires everyone to buy in mitigates the problem because the healthier people help to subsidize the less healthy.

This is closely tied to the industry’s concession to cover patients with preexisting medical conditions as long as everyone is included in the pool. The industry recognizes that getting more of the healthy uninsured into the system will help to offset higher costs associated with treating preexisting conditions.

Do any other industry groups face significant risks?

All of the various industry groups have made voluntary concessions to ensure that health care reform doesn’t proceed without their input.

The managed-care segment is probably the most at risk because that’s the area in the administration’s sights–in fact, industry insiders have started calling it “health insurance reform” instead of “health care reform.” As for the other players, no one group stands out as being particularly at risk.

At this point, it’s very difficult to gauge the risks without a finalized plan.

The pharmaceutical industry is a perennial target for Washington. How will it fare through all of this?

The pharmaceutical industry should hold up fairly well. The agreed-upon concessions amount to $80 billion over ten years and should prove relatively manageable for an industry that generates $700 billion in annual revenue.

Addressing the so-called doughnut-hole issue [a coverage gap in the Medicare Part D prescription drug program] will cost some money, but should pay off in terms of increased goodwill among seniors.

Funding remains the big question. Although Obama has stressed that health care reform shouldn’t add to the federal deficit, there still isn’t complete agreement on how to pay for it.

That could require the pharmaceutical industry to make further concessions.

On the other hand, business could increase dramatically under an individual mandate, and patients would be less likely to underutilize drugs to cut costs.

Producers of generic drugs will likely benefit the most because many of these plans will likely be price sensitive.

Pharmacy benefit managers such as CVS Caremark Corp (NYSE: CVS) and Medco Health Solutions (NYSE: MHS) should also do well because they make more money when a patient opts for a less-expensive generic drug.

Branded drug use will also increase but will be offset by some of the givebacks I mentioned earlier.

What’s your current outlook for the sector?

We think there’s still significant uncertainly about health care reform and how that will play out. But this is very similar to what we saw in 1993 and 1994 with President Clinton’s health care proposals. Back then the sector broadly underperformed while the debate over health care reform raged and then outperformed dramatically. Health care reform didn’t happen that time, but the various proposals appear to be quite manageable for most players within the health care sector.

Once we see what the reform package actually entails, the undervalued names in the sector could outperform.

Amid all this uncertainty, which companies look attractive right now?

Our fund focuses on three kinds of investments, the first of which are core-growth names that make up about half of our portfolio. These companies have dominant franchises that we believe can sustainably grow cash flow and earnings.

A good example would be Roche Holding (OTC: RHHBY). It’s the world leader in cancer therapies and recently acquired Genentech, the leading biotechnology firm. That integration appears to be progressing well. The deal significantly expands Roche’s pipeline and should accelerate earnings growth.

Opportunistic names make up roughly a quarter of our portfolio. These are companies facing short-term challenges to which the market is overreacting.

Genzyme (NSDQ: GENZ) falls into this category. The company produces a number of drugs that address significant unmet medical needs–for example, when a patient lacks a critical enzyme and requires enzyme-replacement therapy.

Genzyme is suffering through one of the most difficult periods in its history after manufacturing issues and contamination shuttered one of its plants. That’s led to shortages of one of their products and significant weakness in the stock, but the company has resumed production after identifying and cleaning up the contamination.

The last quarter of our portfolio comprises emerging growth stories, companies whose new drugs or product cycles should drive significant earnings and free cash flow acceleration.

Alexion Pharmaceuticals (NSDQ: ALXN) is a good example. It makes Soliris, a drug that addresses a rare blood disorder called PNH that causes the immune system to attack red blood cells. Alexion has the global rights to this drug, and it’s approaching $400 million in sales this year–and that’s only a couple of years into the rollout.

The drug could also address other significant autoimmune disorders such as AHUS, a rare kidney disease. Several early studies have shown that the drug could be highly effective in treating that disorder.

More important, the drug could be effective in transplants where the recipient’s body is likely to reject the new organ.

Another emerging growth story is Human Genome Sciences (NSDQ: HGSI), which developed a drug that addresses systemic lupus with Glaxo-SmithKline (NYSE: GSK).

Lupus is a longstanding unmet medical need; a new therapy hasn’t been approved in over 50 years.

A large Phase III trial recently returned positive results. If the drug gains approval, it could be a multibillion-dollar blockbuster.