Research in Action: Politics and Snafus Aside, a Strong Prognosis for Health Care

May 15, 2014 9:46 AM
By Devesh Karandikar

Analyzing companies that stand to benefit from greater utilization of products and services thanks to a much larger patient population


Think the Affordable Care Act (ACA) has been bad for health care stocks? Actually, health care has been one of the best performing sectors in the S&P 500® Index in the past five years (see accompanying chart), and the fundamentals for industry leaders remain strong as the insured population and healthcare spending continue to grow. (See "Genes, Drugs, and Rock and Roll.")

Now I know what you’re thinking: for a significant number of patients, particularly ones who lost their previous coverage, "affordable" has meant higher deductibles, costlier hospital and drug bills, and smaller benefits. 


Chart. 1. Health Care's Five-Year Annual Return Has Been 20.79%
Price changes in the S&P Health Care Index, April 16, 2009-April 16, 2014

Source: Standard & Poor's.
Past performance is not a reliable indicator or a guarantee of future results.
For illustrative purposes only and does not reflect the performance of any Lord Abbett mutual fund or any particular investment.
The S&P 500® Health Care Index comprises those companies included in the S&P 500 that are classified as members of the health care sector as per the Global Industry Classification Standard (GICS). The index is unmanaged, does not reflect the deduction of fees or expenses, and is not available for direct investment.


Well, the ACA is somewhat of a misnomer, since a significant number of already insured individuals now pay more for less coverage (while high earners pay more taxes). But I’ve recommended a number of hospital, drug distribution, and medical device companies that stand to benefit from greater utilization of products and services thanks to a much larger population of newly insured patients. Although some states have refused to expand coverage of Medicaid (even though the costs are covered by the federal government), I expect several will eventually do so.

The more the insured patient population expands, the more utilization should increase. So, one of our favorite names in drug distribution is a company that has broadened its reach to capitalize on a higher number of physician office visits. I’m also bullish on certain device makers that stand to benefit as a rising number of insured patients elect to have procedures, such as hip and knee replacement, which have been on hold for years, even with sharply higher deductibles.

Of the 8 million patients who have signed up on health exchanges, 72% of them are over 34, according to the Obama administration, which suggests they're going to use more products and services. Those deductibles will likely turn out to be a small portion of the overall healthcare dollars spent by that age group.

Bullish about health care? Join the conversation.

Lord Abbett Research Analyst Devesh Karandikar covers the healthcare services and medical device sectors.

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