What Obamacare repeal means for health stocks

Politics have long buffeted health care stocks, but lately it has boosted them. Last week, as the Senate GOP leadership unveiled its new health insurance plan, these shares advanced a robust 3.7 percent. That surge pushed them into the exalted status of the best-performing sector for the year thus far. Health care stocks are now beating the recent champ, technology, 16.7 percent versus 16.4 percent.

Of course, health stocks' symbiotic relationship with government policy means they could suffer anew. Senate Majority Leader Mitch McConnell, R-Kentucky, wants to put his Obamacare repeal bill to a vote this week before Congress leaves town for its week-long July 4 holiday recess. But given the opposition McConnell's proposal faces from Democrats and several Republican senators, Washington gridlock could drag down health stocks again.

Despite the sector's current strength, a UBS Securities research note said Monday, "politics has not been kind to health care stocks." To see why, let's examine their trajectory over the past two years, using the Health Care Select Sector SPDR (XLV) exchange-traded fund as a proxy for this group. 

This fund's previous peak, around $75 per share, was in July 2015 just as the presidential campaign was getting under way. The candidates' rhetoric was far from soothing for the health care industry. 

Donald Trump and other Republicans were adamantly against President Barack Obama's Affordable Care Act, or ACA, and their stance promised major disruption ahead. Hillary Clinton, eventually the Democratic nominee, inveighed against high drug costs. 

Health stocks plummeted as a result, and the health fund bottomed out at about $61 right before the election, a 19 percent drop. 

Nowadays, however, the fund has roared back to just above $80. While some on Wall Street at first saw the GOP effort to repeal and replace Obamacare as a threat to health companies, that sentiment appears to have shifted to a more hopeful one.

Last week's boost -- the fund was flat on Monday -- was sparked in part by the McConnell plan's call to eliminate taxes on the industry and to stabilize the ACA's insurance exchanges with government subsidies. 

The Senate proposal "is more generous and more positive to the industry than expected," Jeff Jonas, a portfolio manager with Gabelli Funds, told Reuters. 

Another plus: If the Republican Congress can take care of health care, a necessary first step before moving on to other issues such as a tax code overhaul, health providers stand to benefit: The industry, UBS noted, has the second-largest trove of cash parked overseas, $179 billion, behind technology companies' $630 billion. Republicans want to lower corporate tax rates to entice U.S. businesses to bring their foreign cash hoards home. 

At the same time, biotech firms got a reprieve from the Senate plan, which failed to mention higher drug costs. These companies largely depend on concocting new pharmaceuticals, which often fetch premium prices. The iShares Nasdaq Biotechnology Index Fund (IBB), tracking a key biotech benchmark, jumped 9 percent last week. That allowed it to recover more than half the ground it lost since falling from its mid-2015 high.

None of this means that passing some form of ACA replacement would end up as a boon for the industry. If under GOP legislative mandate, Obamacare subsidies end up yanked from patients and providers, health stocks could get whacked once more. 

A second baleful scenario: If Republican efforts are stymied, and Obamacare endures, only to find itself starved of federal funding by the Trump administration, it won't be good news for health care investors. 

Capitol Hill opposition to the Senate and House blueprints to replace the ACA mostly rest on the limits they would impose on health coverage. The Congressional Budget Office projected on Monday that 22 million Americans would lose health insurance under the Senate bill, almost as many as the CBO estimated for its House-passed  counterpart. 

And long term? Due to the aging U.S. population, as well as increasing innovation in medical technology, the prospects for health companies have long appeared bright. For that reason, health care has been the best stock performer over the past five years, edging out consumer discretionary and third-ranked financials.

Nevertheless, regardless of what happens with replacing Obamacare, some argue that health stocks are headed for trouble because industry dynamics will make drugs and medical care cheaper.

"The consolidation [of health companies] means buyers are becoming more powerful than the sellers," which would bring cheaper prices, argued Doug Sandler, chief equity officer at RiverFront Investment Group. 

For instance, UnitedHealth Group (UNH), the managed care titan, is the sixth-largest company on the Fortune 500 by dint of its steady diet of acquisitions through the years. To Sandler, this concentration of power eventually will bend medical prices downward. 

Beyond that, the federal government, which provides Medicare and Medicaid, has a large say in health policy -- and will continue to. As the gyrations of health stocks have shown, Washington policy always can change.

  • Larry Light

    Larry Light is a veteran financial editor and reporter who has worked for the Wall Street Journal, Forbes, Business Week, Money, AdviceIQ and Newsday.