A short update on the state of the healthcare sector

Paolo Bascelli, Milan, 24/05/2019

The healthcare sector is again under scrutiny of financial analysts, as it was when US Congress enacted the Affordable Care Act reform (also known as ACA and renamed also as Obamacare). The reason behind a new interest in the perspectives of the sector comes from the proposal of US Democratic Senator Bernie Sanders, among candidates for US 2020 Presidential elections, to adopt a Beveridge health system model, named “Medicare for All”.

 

There are three different health system models: the Beveridge one, the Bismarck one and the private insurance model. In Beveridge health system model, medical and assistence services are provided mainly through public entities and the financing of these services comes from public tax revenue: this system is adopted by Italy. The Bismarck health system model is based on a insurance principle which guarantees medical aid to workers and their respective families based on contributions paid to insurance companies. Medical care is provided by public and entities and the health system is financed by mandatory contributions paid by work employers and employees: this is the German health system. A private insurance health system model makes necessary for people to insure themselves to get medical aid. Services are provided only by private structures and people who have not insured have a minimum level of medical care: this is the health system adopted by United States.

 

ACA achieved the objective of increasing the percentage of people with a medical insurance, without changing health system, as otherwise planned by Bernie Sanders through his “Medicare for All” reform proposal. The approvation of this new reform is very difficult for many reasons. In first place approving and enacting a reform of this magnitude requires a strong Democratic majority in House of Representatives and Senate, in addition to a new US Democratic President. In second place it is mandatory to find all financial resources required to start the reform program: all funding forecasts seem too optimistic and even so insufficient compared to estimated costs. In third place providing medical aid services in a Beveridge model requires a great cooperation between federal government and single state governments, particularly difficult to reach, especially if we consider that single state governments have to give their authority on health to the federal government. Given all reasons above it is more proper to consider “Medicare for All” a political trick to shift the attention of public debate and to force Republican contenders to discuss about health system. From a financial point of view, the healthcare sector, after a volatile period subsequent to the enacting of the Affordable Care Act, is stronger than before thanks to all mergers and partnerships between competitors operating in healthcare and more able to absorb exogenous shocks. Despite of that in first months of 2019, the healthcare sector performance is fairly lower (+3,97% year to date) than the performance of the main benchmark index (+15,36% year to date). This difference has two different causes. The first is due to a financial portfolio rebalancing, with a switch from anti-cyclical sectors investments (as the healthcare sector) to pro-cyclical sector investments. The second cause is that healthcare firms didn’t partecipate in the financial market collapse of last months of 2018 that turned all positive earnings of first 9 months of 2018 in negative ones: so there is no reason for a technical rebound as for the most penalized stocks of 2018. In perspective, despite of being highly unlikely, the approval of “Medicare for All” would cause strong pressures in the healthcare sector with some differences. The highest threat will fall on pharmaceutical firms and not on insurance companies as it is widely thought, because pharma’s will need to cut their retail prices, due to negotiations with the federal government as established in “Medicare for All” reform. It is suggested, in this case, to privilege investing in high quality healthcare firm stocks, well diversified both geographically and in terms of products portfolio, rather than investing in a broad healthcare ETF, aiming to a quality investment rather than a pre-constructed risk-yield optimization investment.

 

Disclaimer: This article represents the opinions of the author and of the supervisor. No compensation is received for expressing these opinions. Here we declare, in addition, to have no commercial relationship with societies and research institutes cited in this article.

 

Additional note: stocks are a volatile financial instrument, so the percentage in the financial portfolio needs to be coherent with investor’s risk aversion. It is suggested to rely on a financial professionist able to mitigate risk in an efficient way.

 
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