Issue No. 7: Financial Effects of ACA on Health-Care Sector

Wide Disparities in Stock Returns and Profit Growth;
Health Insurers Big Winners, Pharmaceuticals Trail

With Congress considering changes to the Affordable Care Act (ACA), it’s a good time to take a look at the winners and losers among health industry groups from the reforms enacted during the Obama Administration. The ACA was signed in March 2010, but uncertainties about its structure and implementation continued for many months afterwards. We decided to look at stock performance and profit growth for groups and key individual companies over the five years ending Feb. 13, 2017.

Stock Returns

The S&P 500 Health Care Index, which includes all the health components (pharmaceuticals, biotech, insurers, hospitals, and more) in the Standard & Poor’s 500-Stock Index, the large-cap benchmark, returned an annual average of 14.9% for the period (all returns include dividends). That is a full point better than the S&P 500 itself.

The S&P 500 Select Pharmaceuticals Index, by comparison, returned an annual average of just 11.7% over the five years. 

The four largest U.S. pharmaceuticals, by market capitalization (shares outstanding times price), are Pfizer, which returned an annual average of 12.2% over the five years; Merck, 14.1%, and Bristol-Myers Squibb, 13.1%. Johnson & Johnson returned an annual average of 14.9% over this period, but a bit less than half of its sales came from prescription drugs, the rest from medical devices and consumer products.

There are no separate indexes for health insurance stocks or hospitals, but theDow Jones U.S. Select Health Providers Index includes the largest public companies from these sectors as well as pharmaceutical benefit managers (PBMs), nursing homes, and Medicaid and Medicare service specialists. The index has returned an annual average of 16% for the past five years – more than a point better than health-care stocks overall and more than four points better than pharmaceuticals.

The largest individual health insurers have done extremely well. UnitedHealth Group has returned an annual average of 25.8%; Aetna, 22.5%; Cigna, 27.3%; and Anthem, 21.8%.

There are few large publicly traded hospital companies, but the largest, by market cap, is HCA Holdings, which has returned an annual average of 26.5% over the past five years. In the PBM sector, which also has only a few large players, ExpressScripts returned an annual average of just 6.4%, and CVS Health, which owns the giant PBM Caremark as well as the drugstore chain, returned 14.4%. Among medical-device makers, Stryker returned 19.3% and Becton Dickinson, 19.9%. Among wholesalers, Cardinal Health returned 15%; McKesson, 12.2%.

Biotechs excelled. The Nasdaq Biotech Index, which includes 164 stocks, returned 19.8% over the five-year period. Among individual large biotechs, Amgen returned an annual average of 21.8%; Gilead, 20.9%; Biogen, 19.9%.

Profit Growth

We also looked at annual average earnings growth over the same five-year period, using data from the Value Line Investment Survey. 

The four large pharmaceutical companies, taken together, registered average annual earnings-per-share growth of less than 1%. Pfizer did best, at 4%, followed by J&J at 3.5%.

Earnings at the four health insurers, by contrast, grew an annual average of 12%, with Aetna leading at 14.5%, followed by Cigna at 13.5% and UNH at 11%. HCA’s earnings growth averaged a whopping 19%; Express Scripts, 10%; CVS, 12%. Among biotechs, Gilead led on the strength of its Hepatitis C drugs, with five-year average annual growth of 38.5%, following by Biogen at 29% and Amgen at 14%. Becton-Dickinson, the device maker, grew at a rate of 7%; McKesson, the distributor, at 16%.

Of course, in all these cases, factors besides the ACA influenced profits and stock prices, but it’s nonetheless clear that the biggest gainers were health insurers, selected hospitals, and biotechs. 

Here is a table that shows some of the more important figures:

​Health Spending Growth: Hospitals, Doctors Outpace Pharmaceuticals

The Altarum Institute on Friday issued a new report on health-care spending in the U.S. during 2016. Of the three major categories of spending, which account for 62% of total costs, the slowest growth came from pharmaceuticals. Prescription-drug spending rose 4% in 2016 compared with 2015. By contrast, hospital-care spending rose 5.3%; physician and clinical services, 4.9%. Gross domestic product over this period rose 3.5%.

In dollars, hospital spending rose $44 billion in 2016 over 2015; physician and clinical rose $31 billion; and prescription drugs, just $13 billion. In other words, hospital and doctor spending increased more than five times as much as drug spending.

According to the Altarum report, hospitals represented 32% of total spending in 2016; physicians and clinical, 20%; drugs, just 10%. 

If policy makers want to make a dent in overall health-care spending, they should direct their attention to where the money is. The U.S. now spends $3.4 trillion on health care. Of that, $1.1 trillion goes to hospitals; $683 billion to physicians and clinical services; and $347 billion to prescription drugs. Also, as we have pointed out before, spending money on drugs frequently preventsspending on hospitals and doctors. 

Drug-Pricing Policies: Some Predictions

In the Feb. 2 issue of the newsletter Axios Vitals, reporter Caitlin Owens makes some predictions about likely – and unlikely – policies regarding drug pricing.

 “Most likely,” she says, will be “a host of policies designed to bring more generic competition to the market” by speeding up the approval process and other measures. 

“Somewhat likely” are: increasing competition in Medicare Part B (drugs administered in doctors’ offices and hospitals); “increasing drug price transparency,” perhaps by “asking manufacturers to report on how they set prices”; plus, “something targeted at middlemen in the pharmaceutical supply chain [who] drive up the prices of drugs.”

“Less likely” are “allowing Medicare to negotiate drug prices” and importing drugs from abroad, policies that may have populist appeal but don’t necessarily make sense in practice. ​