Sixty: That’s how many votes Majority Leader Harry Reid (D-NV) will need to move omnibus healthcare legislation out of the US Senate.

Up until last week, the task seemed overwhelming even for an accomplished parliamentarian of Reid’s talents. Then came the long-awaited report from the US Congressional Budget Office (CBO), stating the Reid bill would accomplish its goals of extending health insurance to 30 million more Americans, cut the federal deficit over 10 years and bring down premiums for most payers in the bargain.

With Republicans virtually united in opposition to any bill, getting to 60 was always going to take the vote of all 58 Democrats in the upper chamber and almost surely independents Joe Lieberman (I-CT) and Bernie Sanders (I-VT) as well. And the horse-trading is far from over, with individual Senators and coalitions now offering up a wide array of amendments.

The CBO report, however, has given moderate Democrats all the wiggle room they need to support the general thrust of the bill. And while there are still many details to iron out, it now looks much more like a question of when rather than whether we’ll see legislation. In fact, a consensus seems to be forming that something will reach the president’s desk in time for his State of the Union address next month.

As in all things Washington, there are definite winners and losers. And with the cost of this bill now projected at somewhere around USD850 billion over 10 years, there are going to be more than usual on all sides.

One group of companies looks ready to profit regardless of how the details on the Democrats’ plans shake out: Canadian providers of health care products and services.

Unlike the US, Canada’s health insurance system has been run for decades by Ottawa. Many of its essential functions are provided by private enterprise. The companies compete with each other for business.

The winners enjoy some of the most secure revenues of anywhere on the planet. Further, as is the case with government contracts worldwide, once they’re on top they tend to stay there.

Conservative Holding CML HealthCare Income Fund (TSX: CLC-U, OTC: CMHIF), for example, has been able to grow its revenue by 8.7 percent over the past year by continuing to add to its portfolio of medical imaging and radiological testing centers.

FutureMed Healthcare Income Fund’s (TSX: FMD-U, OTC: FMDHF) sales are up 9 percent as demand for its disposable medical products pushes higher, recession or no.

With Uncle Sam becoming a bigger player than ever in the US health care market, US companies are going to have to deal with the government’s market power as well as new regulations. And that task will be even more difficult if proponents of a “public option” succeed in keeping that in the final legislation.

Canadian companies that choose to compete in the US will also have to adapt. That’s hardly anything new for them, however. And with the Canadian system relatively stable now, they’ll still have a secure base of revenue back home to smooth out the bumps on the road.

There’s still a lot of heavy lifting to do to make this US health care overhaul a reality. Opposition remains fierce, including, I’ll wager, among many Canadian Edge readers. And anything that does pass is almost certain to be challenged and changed in the future.

Here too, however, Canadians have an advantage: They continue to make money from growing demand in their own country. The possibility of 30 million more insured Americans–a number that’s pretty close to the entire population of Canada–is a tremendous potential spur to growth.

And the surge in the Canadian dollar over the past several years has dramatically increased their buying power in this country, hence their ability to expand.

My picks, however, will be in great shape whether anything passes the US Congress or not. Moreover, all of them pay dividends far higher than any US rival–and they pay in Canadian dollars, so they’re hedged against both inflation and a dollar crisis that could well results from new spending.

All are in line to beat expectations for their payouts when they convert to corporations, probably sometime late in 2010. And they’re takeover candidates as well.

You may support US health care overhaul or be staunchly opposed. But these recession-resistant, high-yielding, low-priced and growth-focused companies will boost the health of any portfolio. And that, not politics, is always the bottom line for investment success.

Growing the Rolls

The CBO report notwithstanding, there’s plenty to dispute about the now 2,074-page health care bill’s costs and projected benefits to the US economy and federal budget.

What is clear, however, is passage will bring millions more to the ranks of the insured. And even if the tally is less than 30 million, it will mean dramatically more demand for products and services.

For some sub-sectors of health care, the balance of costs and benefits is quite uncertain. That definitely applies to the private insurers, who may no longer have the field to themselves and, at a minimum, will have to cope with myriad new regulations.

Hospitals, too, face potential upheaval from the proposed reduction in Medicare spending.

For other companies, however, the benefit of bigger insurance rolls means a potential swell in revenues with relatively little cost in additional regulation. And for Canadian companies, any burdens will be even less significant, thanks to long histories of dealing with a government-run system.

I’ve presented three graphs to demonstrate the magnitude of the opportunity. “Grayer Days” highlights a now well-known trend, the aging of the North American population and, in particular, the growth in the number of citizens aged 65 and older. In the past 30 years, the population of seniors has grown by 40 percent, creating an explosion of demand for services in the health industry.

In the next 20 years those numbers will nearly double again, as the Baby Boomers come of age. That, of course, means greater costs to the system, particularly if universal health insurance coverage remains the goal.

The flipside is a phenomenal increase in demand for everything from testing services and disposable medical supplies to retirement community facilities.

Some variation of “Filling the Gap” has no doubt been used by countless focus groups and Congressional committees as the health care debate has heated up this year.

It tracks the growth of the total population of the US along with the growth of Americans with health insurance.

One takeaway that may surprise some is that the number of insured has risen since 1980, in fact quite dramatically. The other, however, is that the US population has risen even faster. That, in effect, is the reason for the growing number of uninsured Americans.

Signing up the vast majority of those in this “gap” in one fell swoop spells nothing less than a windfall for the best-positioned health care companies, which goes a long way toward explaining why much of the industry is actually supporting rather than opposing the Democrats’ bill.

“Supply Shortage” shows the mercurial growth of demand for disposable medical products (DMP), which include everything from sanitary gloves to wound care and incontinence products.

Top-flight surgeons, revolutionary new drugs and advanced equipment may grab the headlines in the medical world.

But disposable medical products are needed for virtually everything. And the more people are receiving health care, the greater demand will be.

The Fredonia Group, an industry market research firm, estimates upper single digit annual growth in demand for DMPs over the next several years in North America.

That figure, however, could prove extremely conservative if the number of insured is ratcheted up by health care legislation.

In fact, it’s already likely becoming a low-ball estimate, as epidemics like the H1N1 virus, or “swine flu,” become more commonplace, and medical services providers of all types must increase their own personal hygiene and insulation from infection.

All three of these trends are bona fide opportunities for massive health care industry growth, even if legislation expires on the operating table during this Congressional term.

And if there is action, they’ll translate into explosive growth for the leaders, particularly the Canadians that have nothing to lose and everything to gain.

High-Profit Providers

I currently track five health care companies and trusts in How They Rate. All rate buys with the exception of Keystone North America (TSX: KNA, OTC: KNAIF), which is actually an owner of funeral homes.

Keystone had been a hold because it’s the target of a takeover offer from Service International (NYSE: SCI) for CAD8 per share in cash.

Two years ago, the company was organized as an income participating security (IPS), combining a high-yield bond with equity into a single high-yielding security. That’s when management elected to separate the bond portion from the equity and begin paying it off.

After a reverse stock split on the equity portion, the share price sank to a low of barely USD2 a share in late 2008 before rebounding sharply this year and finally surging to within an eyelash of the CAD8 per share takeover offer.

The offer represents a total value of a little over CAD33 per share for combined value of the IPS’ former bond portion and equity value. That’s somewhat below the security’s old highs in the CAD50 to CAD60 per IPS range that it last held in late 2007. Unfortunately, it’s about as well as Keystone shareholders are likely to do, as the offer appears set.

Service International isn’t investment-grade rated. But it nonetheless represents a stronger credit than Keystone and is a safe bet to keep paying the interest on the bond portion of the IPS.

However, given the very high interest rate, it’s also certain to be keen to finish paying it off. And the more it’s able to, the less liquid the remaining bonds will be.

The parties have mailed out a circular to investors with details of the deal. As yet, however, the only hint of a closing date is a Mar. 1, 2010, deadline for the offer. Meanwhile, Keystone has suspended all dividend payments on the equity.

As a result, there’s virtually no upside for Canadian investors and the only upside for US holders is potential appreciation in the Canadian dollar over the next several weeks. My view remains that this leaves little attraction for sticking around.

The best course for US investors is to sell any remaining Keystone North America shares as well as its bonds and look for better, more liquid opportunities.

And fortunately, they’re in abundance, mainly the remaining four health care sector plays on my list. I like simple growth stories that back high dividends, and I don’t want my potential returns depending on the US Congress taking rational action.

That’s not the case with any of these. Simply, they’re wired into the opportunities discussed above, no matter what happens in Washington. And they have solid balance sheets and secure dividends as well.

Front and center is Conservative Holding CML HealthCare. We’ve already realized a comfortable return in the shares since adding them to the Portfolio a year ago. But the best is yet ahead for the Ontario-based provider of medical laboratory testing.

The company has been in business 35 years, growing into one of the country’s largest providers of medical imaging and radiology services. It now has over 4 million patients and partnerships with some 25,000 physicians on both sides of the border.

The company’s primary business is in Canada, where it still garners 70 percent of revenue. Management continues to see numerous opportunities in its home country, an assertion backed by the 9.6 percent boost in third-quarter revenue over year-ago tallies.

The US, however, is where CML’s real upside is. This year the company added to its holdings in this country with the acquisition of two medical imaging operations comprising six centers in Rhode Island and Maryland.

Both are expected to be immediately accretive to earnings–a key requirement of management–when they close in coming weeks. And that’s before the impact of 30 million more insured Americans coming on the rolls.

The company also opened a new “modality” medical imaging center in Bel Air, Maryland, in August, part of a partnership with Upper Chesapeake Health System.

Margins on all of these businesses are expected to be in excess of 20 percent. Cost is USD12.3 million in cash and the assumption of capital leases, easily borne by CML’s financial resources and also eased by the appreciation in the Canadian dollar over the past few years.

Diagnostic services for women recently emerged as a major issue in the US health care debate, with the result that considerable funding has been added to the working legislation. Here, too, CML is well ahead of the game with plans to deliver a much broader range of diagnostic services targeted at the female insured.

One key area is digital mammography, which was specifically targeted by several US Senators in the debate and the demand for which continues to grow, particularly for women in their 40s.

The result will be higher profit margins for US operations, which already rose to 13.3 percent of revenue from 11.9 percent a year ago. Cost-cutting was a big part of that, but so were increased reimbursements from the conversion to digital mammography, a march to greater efficiency that should keep on giving on both sides of the border.

Third-quarter cash flows covered distributions and capital expenditures by a comfortable margin, with a payout ratio of 83.8 percent. And the ratio should continue to drop in coming months as new revenue streams are added while costs and debt (down 2.9 percent the last 12 months) are reduced.

Looking ahead to 2011, management stated in its third-quarter conference call that it sees “no compelling reason to convert prior to 2011” to a corporation. Beyond that, it’s making no commitments either about future structure or dividend rates.

That’s kept some uncertainty in the share price. But with management restating its commitment to dividends and on a clear path for growth, there’s a lot of room for upside surprises. CML HealthCare Income Fund is a buy up to USD13 for conservative and aggressive investors alike.

Just as a greater number of insured Americans would swell the ranks to CML’s diagnostic testing customers, so would it continue to boost demand for disposable medical devices. That’s the clear takeaway from “Supply Shortage,” and it continues to be borne out in the trust’s results.

Unlike CML, FutureMed Healthcare doesn’t have any direct US operations. But it’s definitely a beneficiary of a tighter market in North America. Meanwhile, demand continues to surge for its products.

Third-quarter sales rose 9 percent, impressively all from “organic sources,” or existing customers. Nine-month revenue growth was an even more impressive 45.6 percent, driven by the successful acquisition of product maker Dismed. Nursing supply revenues surged 15 percent, fueled in part by rising demand from the H1N1 pandemic.

Such consumable nursing supplies were 91 percent of FutureMed’s total sales during the quarter, and that percentage should continue to grow in coming quarters. The remaining portion of the business is specialized furniture and equipment, demand for which tends to be stable but slower growing because they tend to be bigger-ticket items.

Again, this is a simple story. Demand for disposable nursing supplies will only grow in coming years as new customers are added to insurance rolls, but also as health crises grow.

FutureMed is ideally positioned as a leading supplier of these products in Canada, which means growing sales and cash flows, as economies of scale are realized and costs are reduced.

As a trust, there are still questions about what 2011 taxation will bring. During its third-quarter conference call, management asserted its intention to “remain an income fund until the end of 2010, so as to benefit from the tax advantages as long as possible.”

Beyond that, it’s making no commitments other than “to continue to examine all various alternatives to deal with the changing environment” and to remain “a high-dividend-paying corporation.”

The good news is the franchise is strong and growing. The third-quarter 2009 payout ratio is reasonably low at 73 percent. Cash flow continues to cover capital spending and distributions comfortably. There are no significant debt issues and no major maturities with the company’s credit agreement extended until March 2012.

The yield of more than 10 percent and low price-to-book value of just 1.11 are clear signs investors have set a low bar of expectations here, despite the fact that Bay Street has remained consistently bullish. Buy FutureMed Healthcare Income Fund up to USD10 if you haven’t yet.

My remaining two picks’ future prosperity is rooted in growing demand for the facilities they operate rather than products or services.

Extendicare Real Estate Investment Trust (TSX: EXE-U, OTC: EXTEF) is one of those REITs that ran afoul of the new rules government trust taxation in 2011. For one thing, nearly two-thirds of its business is conducted in the US.

For another, the long-term care facilities it operates on both sides of the border generate revenue that’s not strictly considered rents, including fees for subacute care and rehabilitative therapy services in the US and home health care services in Canada.

As a result, Extendicare began paying trust taxes way back in January 2007 and won’t be affected in any way when the new levies kick in for everyone else in 2011. In fact, with two-thirds of income generated in the US and therefore not subject to the new tax, the potential impact in the future will only continue to diminish, in contrast to, for example, rival Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF).

More important, the company has returned to growth. Third-quarter revenue rose 8.5 percent, leaving out the impact of foreign exchange.

Cash flow, meanwhile, surged 31.7 percent as cost controls and efficiencies expanded margins from 10.4 percent to a record 13.4 percent.

That, in turn, pushed the year-to-date payout ratio down to a very conservative 56 percent.

Managed Care and Medicare Part A remain the company’s two biggest US funding sources.

Unlike many aspects of these programs, rates are expected to continue to move up, in part because of rising percentages of Medicare residents receiving therapy services.

That source of revenue should actually expand in 2010, as the improving economy encourages customers to undergo procedures delayed during the economic downturn.

Meanwhile, in Canada revenue streams are even steadier due to tighter regulation, which also limits competition. And the company is finding ways to grow by constructing new facilities and acquiring others.

Same-facility revenue growth was 4 percent in the third quarter over second quarter levels, while cash flow surged 39 percent. That’s a clear sign that business is getting better for Extendicare. As for financial strength, there are no significant debt maturities until 2013, and cash flow covers interest by a comfortable 2.8-to-1.

These strengths are clearly not reflected in Extendicare’s yield of more than 11 percent. One explanation is there’s still quite a bit of confusion among investors as to the REIT’s exposure to the 2011 tax. But not matter what the explanation, this is one cheap stock and–once 2011 tax issues are fleshed out sector-wide–that big yield is likely to come down in a hurry as the unit price moves higher.

That’s a good reason to buy Extendicare REIT now up to USD8.

Finally, Medical Facilities Corp (TSX: DR-U, OTC: MFCSF) isn’t an income trust at all, but one of the remaining IPS that combines a bond with equity in one high-yielding security. Cash flow comes from controlling interests in four specialty surgical hospitals and two ambulatory surgery centers, all located in the US.

Being organized as an IPS means Medical Facilities’ unitholders have no 2011 worries regarding new taxes or the dividend. Business is solid, with facility service revenue rising 1.3 percent in the third quarter and cash available for distributions covering the payout by a steady 1.1-to-1 margin, after currency impacts, since the company pays dividends in Canadian dollars.

Management also reported facilities expansion is on track. Expenses rose as a percentage of revenue, reflecting what may be a recession-related shift in revenue sources as well as expansion costs. Nonetheless, the company remains a picture of health, evidenced by, for one thing, the steady buyback of outstanding IPS securities.

As an owner of specialty hospitals, Medical Facilities is much more exposed than our other picks to what shakes out from US health care legislation. That’s almost surely what’s behind the deeply discounted share price and high yield of more than 13 percent.

Other investors are no doubt worried about IPSes in general, given the spectacular crackups at several once highly touted names. In my view, however, the meltdowns of such fare as sports concessionaire Centerplate (a US income deposit security) had everything to do with its business being ill-suited to pay big dividends, a drawback that doesn’t apply to Medical Facilities. And in any case, the expectations built into the share price are quite abysmal and therefore easy to beat.

Medical Facilities is the highest-risk play on my list. But it also has the most to gain from US health care legislation, should things break in its favor. Meanwhile, it’s also the cheapest and highest-yielding.