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Healthcare Stocks Are Feeling Ill

Healthcare stocks have lost their defensive appeal and are feeling rather ill for the past few weeks. Shares of healthcare companies, United Health Care and Humana have dropped significantly since the Obama administration outlined a healthcare reform agenda aimed at cutting $175 billion in payments over 10 years to private insurers through the Medicare Advantage Program. Reduction in payments will also affect other healthcare subsectors such as prescription drug manufacturers and hospitals. Medicare Advantage plans are government plans in which patients receive their benefits through a private health insurer and not a traditional Medicare benefit. Medicare is the U.S. government's health plan for the elderly, with nearly 11 million seniors receiving medical and drug benefits. Among the biggest players servicing Medicare Advantage plans are UnitedHealth with more than 1.7 million beneficiaries followed by Humana which offers about 1.4 million members health benefits.

The S&P Healthcare Index which tracks pharmaceutical and healthcare companies has been beaten down as it shed 12.8% in February and began March further to the downside, as it fell 4.7% on Monday.

87% of the S&P Healthcare Index components were down for February, led by Humana Inc, UnitedHealth Group and Conventry Health Care each shedding 37.6%, 30.6% and 23.9%, respectively. Furthermore, roughly 83% of the components are also down for the year, with Humana and KingPharmaceuticals down ~46% and ~36% year to date, both breaching their 52-week lows on Monday. See the table below for 20 biggest healthcare stock losers YTD.

Historically, defensive stocks such as the healthcare tend to perform better amongst other businesses in recessionary times because even in the worst recession people still need treatment for their illnesses. Therefore, even with the new administration's plan, it is not surprising to see that amongst the S&P 500 Top 10 best performers so far this year are biotech company Life Technologies and generic drug manufacturer Mylan Inc. up 19.8% and 17.5% respectively for the year as of March 2 closing prices. If you are invest in healthcare, make sure you research the impact the new government's plan will have on the companies you are considering.

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