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Three Likely Winners in Healthcare

June 22, 2012

The one thing the Supreme Court will have no impact on as it decides the constitutionality of the Affordable Care Act is the immutable trend in U.S. healthcare: the growing cost of caring for an aging population.

A handful of industries will remain profitable despite the thorny politics of healthcare policy, and the best way to view this volatile situation through the lens of stocks is in the long term.

The annual growth rate in healthcare spending is expected to remain around 4 percent from now until 2014, then ratchet up to 6 percent, according to recent forecasts by the Centers for Medicare and Medicaid Services. In comparison, general consumer prices are rising just under 2 percent on an annualized basis.

Other than burgeoning costs, there's demographics. Some 10,000 baby boomers are turning 65 every day - a trend that will continue until 2030, when boomers will comprise almost one of every five Americans, according to the Pew Research Center. Naturally, their healthcare needs will be increasingly costly and complex. They will still demand specialized care for chronic conditions, pharmaceuticals and acute care.

With those likely developments in mind, here are two sectors I think will prosper.


It's an undeniable trend that pharmaceuticals will continue to be utilized as a way to lower overall healthcare costs. From 1999 to 2009 alone, according to the Kaiser Family Foundation, prescription sales rose 39 percent, compared to general population growth of 9 percent.

Only a large-scale government purchasing plan will pare profits in this sector - a good idea for lowering costs, but unlikely politically, at least in the next year or so. Yet as pharmaceuticals and biotech drugs assume an even greater role in managing chronic conditions and preventing surgery, look for growth in this industry.

For a focus on pharmaceuticals, consider the SPDR S&P Pharmaceuticals fund, which holds large manufacturers like Eli Lilly & Co, Pfizer Inc and Abbott Laboratories Inc and lesser-known biotech firms. A more international portfolio can be found in the iShares S&P Global Healthcare Sector fund.

Medicaid And Medicare Managed Care Providers

Once the pariah of health consumers, managed care has quietly been assuming a growing role in reducing healthcare costs in public programs. Cash-strapped Medicaid programs, which cater to the poor, have been accelerating the push to get more patients into these plans and out of costly fee-for-service. At present, there are more than 26 million Americans in Medicaid managed care programs, according to the Kaiser Family Foundation.

The only wild card preventing growth in this sector is whether Congress will restrict or reduce funding for Medicaid, although managed care is seen as a viable way of managing or reducing costs.

If you just want to focus on healthcare providers, then an ETF like the iShares Dow Jones US Healthcare Provider fund is a diverse mix of companies such as UnitedHealth Group, the largest U.S. insurer; Quest Diagnostics, a testing company; and Medco Health Solutions, a pharmacy benefit manager.

Medicare managed care coverage also continues to grow robustly, with 8.4 million enrollees in Medicare Advantage as of April 2011. That's up 6 percent from the previous year, according to the Government Accountability Office. All told, there are more than 12 million beneficiaries in related Medicare managed care programs. Since the program is in fiscal trouble without tax increases or benefit cuts, policymakers may favor moving more patients into managed care.

Although I try to take a global view that discounts short-term market movements, there's still a high dose of uncertainty in my overview.

Congress still needs to work on Medicare reform and find sustainable ways of funding Medicaid programs. The biggest unknown remains political risk and the composition and direction of Congress in 2013. Will it move to contract public programs and shift even more patients into managed care? Or will it shift in the opposite direction to lower costs even more with a single-payer model - probably the least likely scenario. The answer will shape the future of entire industries, so keep monitoring this fickle patient.

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