Whatever one thinks of Obamacare, many health stocks have benefited from increased coverage. The Health Care SPDR ETF is up 129 percent since the ACA was signed into law on March 23, 2010. That beats the S&P 500 return by about 25 percent. Even now, amid an uncertain Affordable Care Act repeal-and-replace effort, the health-care sector is holding up well, up more than 6 percent this year, ahead of the S&P 500 gain.
The health-care index is up 7 percent since the election. That comes even as Rep. Mark Sanford, R-S.C., and Sen. Rand Paul, R-Ky., introduced legislation this week that would repeal most of Obamacare and focus instead on health savings accounts for millions of people. Some in Congress support the plan, saying the majority is moving too slowly.
Some immediate ideas about shortening the enrollment period floated by the Trump administration could help get more people on the rolls sooner, but investors are right to be wary of hospitals and insurers. Investors need to pick their spots among health-care stocks, as some will do better than others. But leaving the hospital and insurance subsectors for dead could be a mistake — at least one of them has fairly good prospects.
While drug and medical device stocks have done well, the sub-industry that could face the most turmoil is hospitals, said Marshall Gordon, director and senior research analyst at ClearBridge Investments.
Since Obamacare was signed into law, the rate of uninsured Americans has hit a record low and several hospitals have had benchmark-beating returns. HCA Holdings, which operates 168 hospitals, has climbed 155 percent since March 2010; Universal Health Services, which owns numerous acute-care hospitals, is up 255 percent; HealthSouth is up 112 percent. They took a hit in November — Universal Health is down 5 percent since the election — but it was short-lived; Universal Health has rebounded strongly so far this year, as have the other stocks, with all three posting double-digit percentage gains.
Experts remain wary. Hospitals were a big ACA beneficiary because many emergency rooms were providing free care for patients. After Obamacare was passed, hospitals started getting paid for that work. "If you're going to provide that care one way or another, the incremental margin is extremely high if you're now collecting," Gordon said.
Brad Sorensen, managing director of market and sector analysis at Charles Schwab, said he can see a scenario under which an ACA alternative won't cover as many Americans as it does now. If that's the case, then these companies could go back to providing services that they won't get paid for. "Hospitals may take a hit, at least at the beginning, because investors may be worried that they'll be on the hook for uninsured Americans again," Sorensen said.
How insurers win in Obamacare's loss
The wild card are health insurers, which may be forced to compete with more players under a Trump presidency. Their costs have risen over the years, and some, like Aetna and Humana, have pulled out of public exchanges because sicker, and more expensive, patients, who need medical care right away, have signed up. Humana just announced this week it will exit ACA markets entirely next year. There have not been enough younger, healthier people who could pay premiums without needing pricey care, Sorensen said.
These companies have been dealing with even bigger headlines, though, as a few mega-mergers in the sector have failed: this week's lawsuit by Cigna against would-be acquirer Anthem after the government rejected its $54 billion deal, and the scrapped $34 billion Aetna-Humana combination.
Even with the wave of mergers stalled, these insurers have all posted double-digit returns since the election. How the insurers fare could now depend more on what the government comes up with to replace Obamacare. Sorensen said he believes it will be a net positive for insurance companies. At the moment, states have varying regulations when it comes to insurance. If those rules can be streamlined, then that would be a benefit to these companies. The insurers may also be able to get more creative in their offerings. They could offer more bare-bones insurance to younger people who might only need emergency coverage, versus covering the cost of physicals or certain drugs, he said. This is similar to what was offered before the ACA mandated certain minimum coverage, Sorenson said.
While returns have been strong in the Obamacare era, insurers continue to blame Obamacare's imbalance between unhealthy and healthy patients for weak performance, including Molina Healthcare, which on Wednesday plunged near-20 percent after a weak earnings report that it said resulted primarily as a result of the Affordable Care Act markets. Molina's shares have risen 246 percent since Obamacare was signed into law.
Gordon likes UnitedHealth Group, which also offers patients and doctors a variety of other services, like medical record-review services and health information services through its OptumHealth technology affiliate. It's diversified, but it's also a major player in employer-sponsored insurance and Medicare and Medicaid. Its stock rose by more than 300 percent since Obamacare came to be, and it has risen 15 percent since the election and 3 percent this year.
It's well positioned that even if there are changes, its government business should grow. That's because Medicare Advantage, a private market option for people over 65, is the fastest-growing managed-care business. It's generally well funded under Republican administrations, Marshall said, and it's growing because of more aging seniors. UnitedHealth is the leading underwriter of Medicare Advantage, and they have the largest and fastest-growing business. Ultimately, it could see double-digit earnings growth for "quite a while," he said.
— By Bryan Borzykowski, special to CNBC.com