Healthcare: Investing Trends for 2009

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by: Mike Havrilla

Healthcare investing trends in 2009 and beyond will be affected by the new administration's plans for healthcare reform, which are summarized at the Change.gov website. A key feature of the plan is making health insurance coverage possible for all Americans using the existing network of insurers and providers. The plan relies on tax credits for small businesses and eligible individuals to help pay the cost of health insurance premiums. Also, large employers which do not offer health insurance benefits would be required to contribute a percentage of their payroll toward the cost of healthcare for their employees.

Insurance companies would be required to cover pre-existing conditions and the insurance market will be reformed to eliminate anti-competitive practices, including the creation of a National Health Insurance Exchange with a variety of affordable health insurance options. Investments in health information technology (Health IT) will be made to encourage e-prescribing and electronic recordkeeping to reduce the incidence of medical errors and encourage the portability of health information.

The plan would also promote the use of generic drugs through increased substitution rates for higher cost brand names where feasible and prevent lawsuits which delay or block competition from generics. Other areas of focus include required coverage of preventive medicine services such as cancer screenings and increased funding for state and local governments to prepare for bio-terrorism and natural disasters.

Below are links to new ETF Innovators (ETFI) healthcare indexes and ETF ideas which will be affected by pending plans for healthcare reform and other trends in the sector:

Global Health IT: A small and mid-cap index of companies which provide e-prescribing and healthcare information systems to reduce medical errors and improve health outcomes through the application of technology, including companies such as Allscripts-Misys (NASDAQ:MDRX), Cerner (NASDAQ:CERN), and Eclipsys (ECLP).


Global Healthcare Cost Containment: Includes generic drug and product companies such as Teva Pharma (NYSE:TEVA) and Perrigo (NYSE:PRGO) as well as pharmacy benefit managers such as MedcoHealth Solutions (NYSE:MHS) and Express Scripts (NASDAQ:ESRX) which share a common theme of promoting the use of generic equivalents to lower healthcare costs.

Big Pharma: The outlook for pharma companies which rely primarily on brand, patent-protected drugs is not as robust and even Pfizer (NYSE:PFE) has announced plans to begin selling generic drug products beyond their in-house Greenstone business while Merck (NYSE:MRK) has started a bio-generic divsion. The Obama-Biden plan will promote increased substitution rates for generics, importation of pharmaceuticals from outside the U.S., and legislation for bio-generics – all of which favor companies in the Healthcare Cost Containment Index over traditional brand pharma.

Preventive Medicine: Vaccine makers such as Emergent BioSolutions (NYSE:EBS) could benefit from increased government sales of its bio-defense products such as BioThrax while diagnostics and clinical lab services companies such as Genomic Health (NASDAQ:GHDX), Sequenom (NASDAQ:SQNM), and Genoptix (GXDX) are set to experience increased demand for diagnostic screening tests and lab services to guide treatment for complex diseases such as cancer.

Cosmetic & Reconstructive Medicine (CRM): The CRM Index includes stem cell and regenerative medicine companies which are poised to benefit from increased spending on scientific research, including companies such as Osiris Therapeutics (NASDAQ:OSIR), Cytori Therapeutics (NASDAQ:CYTX), RTI Biologics (NASDAQ:RTIX), Integra LifeSciences (NASDAQ:IART), CryoLife (NYSE:CRY), StemCells (NASDAQ:STEM), Geron (NASDAQ:GERN), and Aastrom Biosciences (ASTM).

Global Hospitals & Outpatient Healthcare: Universal Coverage – Hospital companies such as Tenet (NYSE:THC) are hoping for some relief from President-elect Obama's plan to provide health insurance coverage to the uninsured, lowering the expense of bad debts and shifting more people away from seeking emergency room care for ailments which could be treated through primary care physicians or medical clinics.

Health Benefit Providers: 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 more closely with the government at lower profit margins, but higher volumes as millions of people enter the market for health insurance benefits.

This index of 28 companies contains retail pharmacies such as Walgreen (WAG), pharmacy benefit managers such as MedcoHealth Solutions (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.

Uncertainties over the future path of healthcare reform, rising unemployment (uninsured) rates, and the overall market decline in the past year accounts 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).