Overview & Current Status
Over the past 50 years, the US healthcare system has evolved into one of the country’s largest industries, employing almost 17m workers in more than 784,000 healthcare companies and hospitals. Historical spending on healthcare has increased in the past few years:
Historical & Forecasted Healthcare Spending:
$3.0t (5.3% YoY growth)
$9,523 per capita
17.5% of GDP
$3.2t (5.8% YoY growth)
$9,990 per capita
17.8% of GDP
$3.35t (4.8% YoY growth)
$10,345 per capita
Driven primarily by an aging population, healthcare spending is expected to outpace GDP through 2025 by 1.3bps (5.8% annual growth), ultimately accounting for approximately 20.1% of GDP. Clearly, these increases will have significant impacts on market players, and consequently any changes due to political policy should be assessed appropriately.
Affordable Care Act (ACA) Repeal: Immediate Impact
In late January, President Trump’s executive order reaffirmed his commitment to dismantle the ACA. However, given the obscureness of Trump’s mandates to date, there is an undercurrent of uncertainty regarding who will be impacted the most in a Trump administration. Much of the ACA is controlled by laws or regulations that cannot be undone by executive orders; however, there are some executive orders a Trump administration can make to provide immediate impacts. Some examples include:
Despite the options, there are a chain of events linked to many of these decisions that must be fully considered. For example, if a Trump administration attempts to waive mandates or broaden extensions too significantly, they will face a subsequent lawsuit. Weakening mandates too much could spur healthy people to stop buying coverage, causing insurers to pull out of exchanges. These each have implications for who may be left without insurance: a direct contradiction to pledges by Trump and Congressional Republicans’ not to strip millions of Americans of their insurance.
Winners & Losers of ACA Repeal
Since March 2010 when the ACA was signed into effect, there have been some clear winners in the healthcare industry:
If the ACA was repealed, the following groups would be significantly impacted:
As an industry, healthcare is fairly insensitive to economic cycles and other macroeconomic factors (e.g. oil prices & short-term interest rate movements). Despite the uncertainty that politics introduces, long-term performance of healthcare stocks will likely be driven more by systemic changes including innovation, demographics, company fundamentals, and competition. In fact, intense innovation supports an overall positive outlook for the industry. Additionally, the healthcare sector, which historically trades at a premium to the S&P 500, remains -14% cheaper as of March 2017.
Health care companies’ current balance sheets are solid, their stocks have offered attractive dividend yields, and the sector’s overall cost structure appears to have improved. Demand appears to be on the rise for health care products and services. As such, the current climate is unlikely to challenge industry fundamentals: in the long-run, investments in the healthcare industry are expected to create sustainable value for shareholders.