Gauging the ‘Trump Impact’ on Health Care Stocks
WITH NEW WHITE HOUSE EXECUTIVE ORDERS ON THE ACA, WHAT'S THE IMPACT ON HEALTH SECTOR STOCKS?
By Brian O'Connell, Contributor
Commentary by Chris Hudson, Managing Director
President Donald Trump may be coming up short on his pledge to repeal and replace the Affordable Care Act, but his recent executive orders to change Obamacare could alter the outlook on health care stocks and funds on Wall Street.
"There is no question that the president's executive order has negatively impacted health insurance and hospital stocks in the short term," says Chris Hudson, managing director at Dacarba, a business management consultancy in New York. The executive order adds to the industry's continued uncertainty and the natural stock pullback by the capital markets.
"However, insurance companies will adjust their policy coverage offerings with modified and new plans or raise premiums. I would expect both are likely outcomes to offset cuts from ACA subsidies and stemming from a desire to rebound stock price," he says.
Trump issued an executive order Oct. 12 that targeted several components of Obamacare, citing each as a means of regular Americans getting easier, more flexible and more affordable access to health insurance. The order expands access to association health plans, which is a cheaper type of health insurance that does not comply with ACA regulations. It would take months, or longer, for the changes to go into effect.
The Trump administration says the order will lead to increased competition and lower premiums. Critics say the order will raise health care costs for the sick.
Overall, the weeks following the Trump ACA executive orders didn't have much impact on key health care stocks and funds. The benchmark Health Care Select Sector SPDR exchange-traded fund (ticker: XLV), is up 1.7 percent since Trump's announcement. The Vanguard Health Care Index Fund (VHT), is up 1.2 percent in the same period. Both funds outperformed the Standard & Poor's index, which gained less than 1 percent.
But Hudson says that hospital stocks are vulnerable as Trump attempts to unravel President Barack Obama's signature health care law.
"We have seen over 20 hospital closures or bankruptcy filings so far this year due to financial pressures," Hudson says. "Recent divestitures of hospital locations by large health systems to bolster financial performance further highlight a longer road to recovery for these stocks. The continued financial pressures from payers, suppliers, clinical professionals and increased expectations among patients directly impact hospital operations and their financial performance."
Some of the changes in the ACA were expected, other experts say, and thus will minimize any volatility in health care industry stocks, especially among insurers.
"While there is potential for longer-term meaningful changes in how consumers access health insurance, we believe that for the diversified managed care organizations, these announcements have been anticipated and adjustments have been made," says Scott Yuschak, equity strategy analyst at SunTrust Advisory Services.
Yuschak says the diversified managed care organizations have "added to their revenue base" by offering ancillary services like administering prescription drug benefits, modernizing health care delivery through technology and offering other supplemental insurance products both domestically and abroad.
"Many companies have moved away from the public exchanges and have become more selective on where they offer Medicaid plans," he says. "For the companies with disproportionate exposure to the public exchanges and/or Medicaid, we believe investors must accept more volatility in the stock prices. We think legislation could ultimately come out that addresses these changes, but this is not guaranteed so the stocks could remain volatile."
Overall, Yuschak says his firm remains positive on the diversified large-cap health insurance space. "While valuations clearly are elevated, we like the stable growth rates these companies provide," he says. "Medical cost trends remain benign, and growth opportunities appear robust. We also believe that managed care organizations can present solutions to these policy challenges which could be accretive to growth rates."
Some industry observers note the impact specifically from Trump's announcements aren't "direct hits" to the largest insurers. "Companies like UnitedHealth Group (UNH) and Aetna (AET) have already limited their exposure to volatility in the individual ACA market by pulling out of the market altogether last year," says Howard Yeh, co-founder of HealthCare.com.