Spotlight on US healthcare

Deteriorating sentiment hits US health insurers

Shares in US managed care companies have taken a beating recently with concerns over potential US healthcare reforms weighing on sentiment. While the S&P 500 Index has recovered from its 2018 lows, and is up around 15% year-to-date, the US managed healthcare sector is down by a similar amount since February this year.

The December ruling by a federal judge in Texas that Obamacare (aka the Affordable Care Act) is ‘unconstitutional’ – in requiring all Americans to buy health insurance – has cast a further shadow over the managed healthcare sector.

Politics, politics… a bitter pill to swallow

Followers of the sector will be all too aware of the close correlation between US electoral cycles and the share prices of US managed care companies. While the 2020 race for the White House still seems some way off, presidential contenders have already started to disclose their campaign proposals and, certainly among Democrats, universal healthcare is in focus. Veteran Democrat nominee, Bernie Sanders, has resurrected his proposal to replace private health insurance with a government-run, single payer ‘Medicare-for-All’ health care system covering primary care, hospital stays and prescription drugs.

This sweeping reform goes beyond that enacted through Obamacare, and Sanders is betting his progressive plan will resonate strongly with voters. However, with scant detail on how ‘Medicare-for-All’ will be funded, Republicans – and even some Democrats – are less convinced. Yet, judging by the recent performance of some of the managed care organisations (MCOs), whose profitability would be severely impacted by the changes, investor sentiment is taking a hit. Key players in the sector, United Healthcare and Anthem, have derated substantially against the broader US stock market in recent months.

Are investors’ concerns overblown?

There are many hurdles to overcome before Senator Sanders can enact such a radical overhaul of the healthcare system. Firstly, he would need to win the Democratic nomination, and then garner support for his healthcare plan from the more centrist Democrats – no mean feat. Secondly, assuming he can then go on to win the race for the White House, which is another leap of faith, Democrats would need to retain the House of Representatives and win the Senate. Usually, 60 votes are required to get legislation through the Senate. Currently, the Democrats have just 49 votes (although Sanders is talking about using budget reconciliation as a mechanism to get his bill through, which would only require a simple majority, i.e. 51 votes).

While a single payer ‘Medicare-for-All’ plan seems to be well liked, its popularity tends to suffer when two key conditions of the initiative are highlighted – namely, that it would cost more in taxes and that private health insurance would no longer be an option. A recent survey by the Kaiser Family Foundation showed support for universal healthcare coverage falls from close to 70% to 37% when either of these two issues are raised¹ . Ten years ago, the Democrats had to give up on forcing people to renounce existing insurance plans, which was part of the original Obamacare proposals, despite controlling both the Senate and the House of Representatives at the time.

To the cost issue, at some point the government’s Congressional Budget Office will score this plan, making the cost apparent. The US spends US$3.2 trillion annually on healthcare, approximately half of which is funded by employers and individuals. Any proposal for a single payer plan would see the government pick up a substantial part of this cost, which would have to be funded through tax rises.

Fear vs. Reality

Those with longer memories will recall the dramatic derating of MCOs in 2009, in reaction to Obamacare. The main fear about an enacted piece of legislation on healthcare reform, versus a theoretical possibility, was that US citizens would move away from high-margin commercial insurance towards low-margin healthcare insurance – severely impacting MCOs’ profitability. The reality proved rather different – a large-scale shift to low-margin healthcare didn’t take place, industry profitability grew strongly, and MCOs rerated.

With the benefit of hindsight, 2009 provided a powerful buying opportunity for MCOs. The sector has delivered an annualised 25.1% return over the last 10 years compared to a 15.3% annualised return for the broader S&P 500 Index over the same period² .

Conclusion

US healthcare reform is necessary, given the high and growing cost to the system. Presently, it constitutes around 18% of US GDP versus the OECD average of little more than half of that. However, the likelihood of a single payer, ‘Medicare-for-All’ system being introduced in 2021 seems low, given the inherent costs and political hurdles. While we believe there is scope for MCOs to derate further in the very near term, on the back of these concerns, we would argue that the long-term fundamentals for these companies remain intact.

We see the MCOs as key drivers in moving US healthcare reimbursement from a ‘volume-based’ to a ‘value-based’ approach, which will result in the US getting improved value for money for its healthcare expenditure. As such, we see long-term value in being invested in the US managed care sector, and view the current dislocation in share prices as a buying opportunity.

¹ Source: https://www.kff.org/slideshow/public-opinion-on-single-payer-national-health-plans-and-expanding-access-to-medicare-coverage/

² Source: Bloomberg, as at 9 May 2019. Total returns, assuming dividends are reinvested.


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