Why You Should Be Avoiding Healthcare Service Stocks Right Now

With a relatively light economic calendar this week, the President’s Obamacare replacement bill (the American Health Care Act if you want to use its formal name, Trumpcare if you don’t) takes center stage as the House is tentatively scheduled to vote on it on Thursday. The vote could literally go either way which means healthcare stocks could be in for a volatile week in one direction or the other.

If the CBO’s projection comes true that 24 million more Americans becoming uninsured by 2026 if the bill passes, healthcare companies will be deeply impacted. Insurers will no doubt be affected as fewer people covered would mean lower premium revenue. That’s not even to mention the fact that premiums could be driven further down if price competition increases, a Trump selling point during the campaign. I think though that the hospitals and other healthcare facilities operators, in particular, could be most affected if the bill passes.

The SPDR S&P Health Care Services ETF (XHS) portfolio is broken into four categories…

  • Healthcare service providers - These are companies that provide diagnostics, testing, administration and any other number of services. Top holdings in this group include Express Scripts (ESRX) and Quest Diagnostics (DGX).
  • Healthcare facilities - These are the big hospital operators such as Tenet Healthcare (THC) and Community Health Systems (CYH).
  • Managed healthcare companies - These are primarily the big insurance providers such as Anthem (ANTM), Cigna (CI) and Humana (HUM).
  • Healthcare distributors - These companies are the distributors of drugs and other health care supplies to pharmacies. Holdings in this group include Cardinal Health (CAH) and McKesson (MCK).

The argument as to why the hospitals could be most affected is fairly straightforward. If millions of individuals lose their healthcare coverage, they’ll probably be less likely to seek out medical help. The ones that do show up may have less ability to pay their bills. The hit to hospital companies could be substantial if, as the CBO projects, the new bill disproportionately affects lower income people. Most hospital stocks were down several percent on the day that the bill was announced.

While hospital stocks could see the greatest impact from the bill’s passage, the downward pressure would no doubt spill over into just about every area of the healthcare sector. The insurance providers might also be looking at a smaller customer base to work with and, if the sale of insurance across state lines becomes a reality, prices might be forced to come down amid greater competition. The service providers would be a downstream casualty of weaknesses in the hospital group. Fewer customers could mean lower demand for their services as well.

The upside, however, is it looks like the bill has only a modest chance of becoming law. This Thursday’s vote in the House looks like a tossup although it appears that supporters of the bill may be gaining momentum. Passing the Senate though looks like a taller order with straw polls suggesting that the bill is several votes short of what it will need.

Recent losses in the Health Services ETF have been more modest but the broader Health Care Sector ETF (XLV) is down more than 2% just since the post-Fed meeting highs. At a minimum, investors should be cautious adding healthcare stocks to their portfolios, but I’d be avoiding the sector altogether right now.

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