New Healthcare Cost Containment Index

by: Mike Havrilla

The ETF Innovators (ETFI) Global Healthcare Cost Containment Index profiled in the accompanying table includes companies with market caps over $250M which are involved in the following two segments of the healthcare sector with the common theme of reducing healthcare costs and insurance premiums for consumers, employers, and third-party payers such as the government (through Medicare recipients) and insurance companies.

Generic Healthcare Products: This category includes generic prescription and over-the-counter drug products, led by Teva Pharma (NYSE:TEVA) and Perrigo (NASDAQ:PRGO), respectively. The category also includes diagnostic products such as blood sugar monitors and related supplies, including companies such as Home Diagnostics (HDIX), although its market cap is currently too small to qualify for active inclusion – however it may be an interesting play as an under-the-radar micro-cap value stock.

Pharmacy Benefit Management (PBMs): This category includes the sale of prescription drugs and diagnostic products by either mail order or network retail pharmacies, specialty pharmacy services and drug product sales, drug plan design & management, drug formulary management, but excludes all activities related to the operation of chain drugstores such as CVS Caremark (NYSE:CVS) and health insurance plans such as UnitedHealth Group (NYSE:UNH) in favor of companies such as Express Scripts (NASDAQ:ESRX) and MedcoHealth Solutions (NYSE:MHS).

Health benefit providers have been ailing over the past year, with many companies losing over half of their value such as UNH (UNH), Aetna (NYSE:AET), and Humana (NYSE:HUM) – although the outlook is better for companies which are focused on PBM activities without significant exposure to insurance or retail operations.
As I wrote previously, the CEO of MedcoHealth Solutions, Dave Snow, expressed a bullish outlook for next year on their conference call in early November on the prospects for legislation next year to clear the way for high margin generic equivalents to biotech drugs and the possibility for increased healthcare coverage under President-elect Obama, with the latter expected to increase overall prescription drug sales as more people are covered by drug plans.