Uncertain Outlook for Health Benefits Index

by: Mike Havrilla

The 28 companies included in the ETF Innovators (ETFI) Health Benefit Providers Index (click to enlarge) with market caps over $250M have lost over 40% of market value in the past year on an equally weighted basis.

The index contains retail pharmacies such as Walgreen (WAG), pharmacy benefit managers such as MedcoHealth Solutions (NYSE:MHS), managed care companies such as UnitedHealth (NYSE:UNH), supplemental health insurers such as Aflac (NYSE:AFL), hospital pharmacy operators such as PharMerica (NYSE:PMC), and workers compensation insurers such as Amerisafe (NASDAQ:AMSF) – which is the only company in this index to post a stock price gain in the past year.

Healthcare reform by the new administration could involve mandated insurance coverage for pre-existing conditions and expanded health insurance coverage to the millions of uninsured Americans through tax credits to small businesses and those in need. Managed care companies may find themselves working closer with the government at lower profit margins, but higher volumes as millions of people enter the market for health insurance benefits.

Uncertainties over the future path of healthcare reform, rising unemployment (uninsured) rates, and the overall market decline in the past year account for a large part of the falling profits, murky outlook, and major stock price declines exceeding 50% for managed care companies such as Aetna (NYSE:AET), UNH, Humana (NYSE:HUM), WellPoint (WLP), Cigna (NYSE:CI), and Coventry (CVH).

Although these stocks appear cheap compared to historical valuations, with major uncertainties over healthcare reform and future profitability, I would rather invest in other areas of healthcare with bullish outlooks such as cost containment and preventive medicine.