Investing in health care following shelved GOP reform

E*TRADE Securities2

04/04/17

Following the GOP’s decision to shelve its repeal of the Affordable Care Act (ACA), the potential for reform in the health care industry is certainly down…but it’s not out. And the decision to pull the reform appears to benefit some health care segments more than others. We take a look at potential winners and losers given the current state of play:

  • Insurers could feel pressure. The GOP could still attempt to disrupt the ACA by ending key government subsidies to insurers, which as noted recently by The Wall Street Journal1 could cost insurers billions. Second, this group was primed to benefit from the GOP’s plan, which was set to increase premiums for older consumers while incentivizing younger consumers.
  • Hospitals may breathe a sigh of relief. A spike in the uninsured rate due to the GOP’s plan could have been a brisk headwind for the hospitals group, according to industry experts. More patients without insurance could translate to hospitals footing a greater percentage of treatment costs for those unable to pay. The burden on hospital networks in that scenario would have been significant, according to reports from the American Medical Association (AMA)2 and the American Hospital Association (AHA).3 Unsurprisingly, hospital stocks advanced immediately following the decision.
  • Pharmaceuticals might get caught in the crosshairs. Drug pricing has been a focus of President Trump on several occasions, including via social media, and could become a major topic of conversation with a full Obamacare repeal seemingly off the table.
  • Medical device companies miss out on tax break. A 2.3% excise tax on U.S. medical device sales accompanied the Affordable Care Act and went into effect in 2013. Many in the industry hoped the GOP’s plan would eliminate this tax, which goes back into effect later this year after a two-year pause. 

Health care sector familiar with uncertainty

The health care sector dipped following the election last November, with investors unsure of what reform would entail. But since then it has found footing and become one of the S&P’s best performing sectors.4Helping the sector and its diverse segments is the simple fact that humans need medical care. Demographic tailwinds, including aging Baby Boomers and development in emerging markets, suggest overall health care spending is likely to remain strong, according to the Centers for Medicare and Medicaid Services. 

Up next for health care and beyond

The health care setback for the GOP may prove just that—a setback. Health care reform can be a difficult process, filled with debate and political posturing. So while the battle may be stalled for now, the war in this industry may continue for some time, which could lead to additional sector volatility.

Further, as the GOP seemingly sets its sights on new initiatives, market observers are now grappling with the question of what reforms the GOP will be able to push through. Many now predict that any reform that stands a chance of passing will not happen quickly, as the GOP will need to work through a more typical legislative process that can take several months or more. As market expectations for the Trump administration’s legislative agenda reset, the broader equity markets could face additional pressure.

 

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1. Armour, Stephanie. “After GOP Bill’s Failure, Health-Law Lawsuit Takes Center Stage.” The Wall Street Journal. 27 Mar. 2017. https://www.wsj.com/articles/after-gop-bills-failure-health-law-lawsuit-takes-center-stage-1490643053

2. https://searchlf.ama-assn.org/letter/documentDownload?uri=%2Funstructured%2Fbinary%2Fletter%2FLETTERS%2Fama-letter-on-ahca.pdf

3. https://cdn2.vox-cdn.com/uploads/chorus_asset/file/8112901/MOC_Final_House_Statement030717.0.pdf

4. As of March 31, 2017, year-to-date returns for the health care sector were up 7.89% according to the S&P 500 Capped 35/20 Health Care Sector Index, which comprises S&P 500 constituents in the health care sector and uses capping to ensure diversification among companies within the index. 

Note: The focus on health care-related securities increases exposure to the risks associated with the health care-related sector, including changes in laws and regulations, lawsuits and regulatory proceedings, patent considerations, intense competition, rapid technological change, and the potential for undesirability.