"Medicare for All" has made investors in S&P 500 Health Care sector stocks ill.
It doesn’t matter that the bill stands no chance of passing in the current Congress. Nor does it matter that the presidential election is still a year and a half away.
The mere thought of the government providing health care insurance for all Americans, private insurance being gutted, and potentially immense pricing pressure coming to bear on health care services and prescription drugs sent investors heading for the exits.
The S&P 500 Health Care sector is the worst performing of the S&P 500’s 11 sectors ytd. Here’s the performance derby ytd through Tuesday’s close: Information Technology (27.2%), Industrials (22.4), Consumer Discretionary (22.0), Communication Services (21.5), Energy (19.6), S&P 500 (17.0), Financials (15.0), Real Estate (14.4), Materials (14.1), Consumer Staples (12.0), Utilities (8.5), and Health Care (0.9) (Fig. 1).
Medicare for All isn’t a new idea. Senator Bernie Sanders (D-VT) professed the need for universal health care while running for president in the 2016 election. And Democrats in the House of Representatives introduced their Medicare for All bill in February.
But as one of our favorite Wall Street sayings goes: “It doesn’t matter ’til it matters.” And this month, Medicare for All mattered. Investors seemed to focus on Sanders’ proclamations at high-profile events, and the S&P 500 Health Care sector, which had been underperforming all year, hit the skids, falling 4.9% in April so far compared to the S&P 500’s 3.5% gain (Fig. 2).
I asked Jackie to examine the progression of events that have left Health Care stocks bloodied before the first presidential debate kicks off. Here’s what she learned:
(1) Bernie begins. A look at the stock chart for the S&P 500 Health Care sector shows that 2019 started off with modest gains in the 5% area until the slide began in mid-April. On 4/10, Senator Bernie Sanders (D-VT) introduced the latest version of Medicare for All legislation, describing health care as a right for all Americans.
“The Medicare for All Act would provide health insurance to all Americans under a single plan run by the government and financed by taxpayers; private insurers could remain in business but could only provide benefits, such as elective surgery, not covered by the government. The 2019 version includes coverage for long-term care, perhaps increasing its appeal but also its cost,” a 4/10 NYT article states.
(2) Bernie on Fox. Health care investors got their second scare on 4/15, when Senator Sanders appeared in a Fox News town hall. Anchor Bret Baier asked audience members—who ran the political spectrum—whether they’d be willing to transition from their private insurance to the government-run system championed by Sanders. The response: enthusiastic cheers. After Sanders explained the plan a bit, another round of enthusiastic cheers followed.
(3) UNH CEO weighs in. The following day, UnitedHealth Group’s CEO David Wichmann waded into the Medicare for All debate during the company’s earnings conference call: “The wholesale disruption of American health care being discussed in some of these proposals would surely jeopardize the relationship people have with their doctors, destabilize the nation's health system, and limit the ability of clinicians to practice medicine at their best. And the inherent cost burden would surely have a severe impact on the economy and jobs, all without fundamentally increasing access to care. The path forward is to achieve universal coverage and it could be substantially reached through existing public and private platforms.”
The fact that he spoke so emphatically spooked Wall Street, as if by addressing the elephant in the room, he gave it credibility—tacitly acknowledging that single-payer health care has a real chance of being adopted. It struck us as unwise for a health insurance company’s CEO to jump into the debate against Medicare for All on a call announcing a 22% jump in earnings, $3 billion share repurchase, and $860 million paid out in dividends in Q1.
The Health Care sector has enjoyed huge returns and above-market pricing power in recent years, observed Jones Trading Chief Market Strategist Michael O’Rourke in his 4/17 The Closing Print commentary, noting annualized returns of more than 13% over nine years, amid “exorbitant drug price increases, an industry created opioid crisis, and ever rising insurance premiums and hospital bills”; faster-than-CPI inflation for every health-care-related component of the Consumer Price Index; and a contribution to GDP growth that “has averaged 40 basis points per quarter [which] represents a significant contribution. In the 5 years prior to the passage of the Affordable Care Act, the Medical Spending average quarterly contribution to GDP was half as much.” If reversions to the means are in the offing, that could hurt!
(4) Will Bernie win? It’s far too early to call the 2020 Democrats’ presidential candidate, especially with 19 declared candidates in the fray. That being said, a Monmouth University poll found that 27% of Democratic voters who are likely to attend Iowa’s caucuses in February are likely to pick former Vice President Joe Biden and 16% Sanders, according to a 4/11 NYT article. Sanders’ results fell since last month, when 25% of voters considered him their first choice in a poll by the Des Moines Register and CNN.
But even if Sanders doesn’t win the nomination, Medicare for All is being supported by many other Democrats running for the nomination. Co-sponsors of the bill include presidential contenders Senator Kirsten Gillibrand (D-NY), Cory Booker (D-NJ), Elizabeth Warren (D-MA), and Kamala Harris (D-CA). And the issue has legs: The Monmouth poll found that about half of respondents ranked health care as their top policy priority.
Still, the Democrats would have to win the White House, turn over the currently Republican-controlled Senate, and retain their majority in the House of Representatives. Then they’d have to figure out how to pay for the program.
(5) Dare we talk dollars? The biggest hurdle that Medicare for All faces is its sheer expense: $32 trillion over 10 years, according to two reports (by George Mason University in June 2018 and the Urban Institute in 2016). And this major expense would occur as existing federal programs are running on fumes. Social Security’s costs are expected to exceed its income in 2020 for the first time since 1982, and by 2035 trust funds for both Social Security and Medicare will be depleted in the wake of Baby Boomers’ retiring, according to a 4/22 WSJ article citing trustees of the funds.
The Medicare fund’s sad state will likely force politicians from both sides of the aisle to come up with various ways to save money. The Trump administration has pushed for faster approval of generic drugs and earlier this year proposed eliminating the rebates that drug makers give pharmacy-benefit managers, which negotiate drug prices on behalf of Medicare and health insurers. The government would like those rebates to go directly to consumers. Doing so could hurt the largest pharmacy-benefit managers, including Cigna’s Express Scripts, CVS Health’s Caremark, and UnitedHealth Group’s Optum RX, and it has weighed on their stocks.
Sanders argues that Medicare for All can be paid for with money that’s already being spent in the health care system. A 4/12 MarketWatch article explains: “Americans already are paying for trillions of dollars in health costs—to a combination of private insurers and the federal government. An entirely government-run health-insurance program, as Sanders imagines, would by definition shift those costs onto the federal government.”
Sanders also has proposed new funding sources: a 4% income-based premium paid by employees and a 7.5% income-based premium for employers; a marginal tax rate of up to 70% on those making above $10 million; taxing earned and unearned income at the same rate; limiting tax deductions for those in the top tax bracket; taxing extreme wealth; and making the estate tax more progressive, including a 77% top rate on inheritance above $1 billion.
(6) Potential impact. A single-payer health care system could give the government substantial negotiating leverage in drug price negotiations. The government could theoretically claw back patents if companies refused to give the government its desired price, a 4/11 MarketWatch article suggested. Hospital pricing could also come under pressure since currently Medicare pays much lower prices than private insurance plans. And the government would essentially displace the private insurance industry as it currently exists. Private insurers would be allowed to offer supplemental insurance, but that market is much smaller than their current services universe.
That’s why so many industries within the S&P 500 Health Care sector have tumbled as the focus turned to Medicare for All. Here’s how poorly some of the industries have fared this month through Tuesday’s close: Managed Health Care (-7.7%), Health Care Facilities (-7.0), Health Care Equipment (-6.1), Health Care Distributors (-2.5) and Health Care Services (-2.3) (Fig. 3 and Fig. 4).
The Managed Health Care industry, filled with insurers that face the largest existential threat from Medicare for All, now has a forward P/E of 13.3 which is less than its expected forward earnings growth of 15.7% (Fig. 5 and Fig. 6). Last week’s Barron’s ran a favorable article on the health insurers suggesting that investors with 12- to 18-month horizons should consider buying because Medicare for All has only a 5% chance of being enacted.
At 8.6, the Health Care Services industry’s forward P/E has fallen to its lowest point in 15 years even though its earnings are expected to rebound from sluggish 3.7% growth this year to 9.0% growth in 2020 (Fig. 7 and Fig. 8). Likewise, the Health Care Facilities industry is expected to see its punk earnings growth of 3.2% this year improve to 10.2% next year (Fig. 9). However, its forward P/E is only a smidge higher at 11.1 (Fig. 10). For brave long-term investors, there are many sickly stocks to consider.
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.
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