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Healthy Skepticism: Is the Market Unfairly Punishing Healthcare Stocks?

May 2019 
By Nanette Abuhoff Jacobson

The political debate over Medicare for All has been a headwind for healthcare stocks and may continue to be in the near term.

Managing Director and Multi-Asset Strategist at Wellington Management Company LLP and Global Investment Strategist for Hartford Funds.

In the US, market sentiment toward healthcare stocks has turned negative amid the debate over Congressional Democrats’ proposals for “Medicare for All.” As of this writing, US health stocks are up a scant 4.9% year-to-date—the market’s worst-performing sector (Figure 1).

I believe the market is overreacting and that the probability of the bill’s passage is low. However, uncertainty around the debate could very well weigh on sentiment in the near term and continue to mute healthcare sector returns. 


Unhealthy returns year-to-date for healthcare
Sector YTD Returns (%)


As of May 6, 2019. Source: Bloomberg. Past performance is not a guarantee of future results.


The market is likely punishing healthcare stocks, particularly insurance companies, because if the bill becomes law, it would replace most private insurance with insurance from the US government, which would then become the sole basic coverage health insurer for all Americans. This could drastically reduce the need for private insurance, as insurers would be banned from competing with the government in covering basic provisions (supplemental insurance would still be available for non-basic provisions.)1

I believe the probability of Medicare for All’s passage is low for the following reasons:

Cost — The bill’s proponents have yet to share estimates, but separate studies by George Mason University and Emory University have put the cost of the program between US$24 and US$30 trillion over 10 years. Even if the price tag is lower, an array of taxes would need to be implemented to help pay for the plan. Apart from the overall price are the economic costs. Healthcare employs approximately 20 million people in the US and the sector has been an engine of job growth, even during the past few recessions. Any material changes to the industry could put many jobs, particularly those in the insurance sector, at risk.

Implementation — Passing, much less implementing, a complete overhaul of the US healthcare system would be incredibly difficult, as other attempts at healthcare reform have shown. Assuming the bill passes the Democratically controlled House of Representatives, it would still need 60 votes to get through the Senate, where Republicans currently hold a three-seat majority.

Weak public support — Finally, I don't think voters realize that Medicare for All would ban most forms of private insurance. When the Kaiser Family Foundation asked a random sample of 1,190 adult Americans, “Would you favor or oppose a national Medicare-for-all plan if you heard that it would eliminate private health insurance companies?,” 58% of respondents said they would be opposed.2

When the public understands the high costs associated with Medicare for All and the possible loss of private insurance, the bill may be dead on arrival. I place higher probability on a more moderate solution, such as proposed bills that expand Medicare eligibility to individuals under age 65.

Investment Implications 

Market sentiment could remain negative over the near term. Given that healthcare will likely remain a prominent issue for both political parties in the run-up to the 2020 election, the sector is likely to be volatile for the next 12 to 24 months, with performance driven more by sentiment than fundamentals. So, although healthcare stock valuations may seem attractive, investors should understand that sentiment may take a while to improve.

Long-term investors could consider dollar-cost averaging3 into healthcare. Over the long term, I believe the tailwinds of healthcare innovation, an aging US population, and the globalization of demand for cutting-edge medicine should continue to drive growth and returns in healthcare.

Consider investing with an experienced active portfolio manager. Healthcare is a huge, complex sector that is undergoing tectonic shifts due to innovation and demographics, which are raising long-term demand. An experienced investment team that understands the science and technology, as well as  industry and company fundamentals, may be able to identify attractive opportunities and avoid riskier ones. 

1 The Medicare for All bill would outlaw private insurance companies from offering hospital care, primary care, preventative services, prescription drugs, emergency services, mental health treatment, dental, vision, hearing, and long-term care.

2 The Kaiser Family Foundation’s Health Tracking Poll, conducted from January 9 through 14, 2019. A survey was done of a nationally representative, random digital-dial telephone sample of 1,190 adults aged 18 and older living in the US, 512 of whom reported having employer-sponsored insurance. 

3Dollar cost averaging is an investment strategy where the investor sets a specific dollar amount to be invested at regular intervals, regardless of an asset’s price. Dollar-cost averaging does not ensure a profit or protect against a loss in a declining market.

Important Risks: Investing involves risk, including the possible loss of principal. Security prices fluctuate in value depending on general market and economic conditions and the prospects of individual companies. • Risks of focusing investments on the healthcare related sector include regulatory and legal developments, patent considerations, intense competitive pressures, rapid technological changes, potential product obsolescence, and liquidity risk. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. These risks may be greater for investments in emerging markets. • Small- and mid-cap securities can have greater risks and volatility than large-cap securities.

The views expressed here are those of Nanette Abuhoff Jacobson. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.

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