Scalper1 News
Summary I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios. There are three growth drivers for the health insurance industry: Above Market Sales Growth, Potential Cost Controls and less competition. With little chance of Obamacare being significantly changed or replaced anytime soon, health insurers will continue to report record revenues for an extended period of time. In this article, I will be explaining why I believe the iShares U.S. Healthcare Providers ETF (NYSEARCA: IHF ) is worth considering, because IHF has a large exposure to health care insurers. The reason I am focusing on health care insurers is I recently received a letter from my insurer saying my health care insurance plan would canceled and thus I have to find new insurance. The new plan Regence BlueCross BlueShield suggested for me was the “cheapest” premium plan that the company offers, which is what I was looking for. I am a healthy 29 year old and I have not needed to go to the doctor for years, and only for minor items like a sinus infection etc, therefore a cheap plan is ideal for me. However, the new “cheap” plan costs 156% more [yes you read that correctly] than my current plan, and thus is the reason I started looking at IHF because of its large exposure to health insurers. If my wallet is going to be emptied by health insurers, I might as well invest in health insurance stocks to minimize the impact of the significantly higher premiums I would have to pay. This is a massive opportunity for insurers when they are able to cancel plans like mine and charge significantly higher rates to healthy individuals who do not use their health insurance or use it sparingly. Growth Drivers Driver #1: Above market sales growth Health Insurers make up just over 52% of the holdings of IHF and over the last five years IHF has had a total return of just over 155% compared to a nearly 91% total return for the SPDR S&P 500 Trust ETF (NYSEARCA: SPY ). (click to enlarge) [Chart from dividendchannel.com] This outperformance is driven by the above market growth that health insurers have had over the last five years. The average sales growth for Aetna (NYSE: AET ), Anthem (NYSE: ANTM ), Cigna (NYSE: CI ), Humana (NYSE: HUM ) and United Health (NYSE: UNH ) over the last five years has been 10.76% compared to 6.64% for the average of all S&P 500 companies. When health insurers cancel plans like mine, and charge exorbitantly higher rates for new plans as well as continuing to raise rates for everyone else, it is easy to see that sales will continue to grow at a faster pace than the rest of the S&P 500. Driver #2: Prescription drug cost controls Recently Hilary Clinton announced her plan to try to control and lower the costs of prescription drugs. If prescription drug cost controls were to be put into place, health insurers would be the big winner in my opinion. If prescription drug costs are significantly reduced under the type of plan proposed, do you think health insurers would pass that cost savings to consumers? In my opinion there is no way that health insurers would pass these cost savings onto consumers through lower premiums. Therefore, if premiums remain the same and/or continue to grow and insurers have to pay less for prescription drugs their margins would expand significantly. Driver #3: Less competition With Aetna purchasing Humana and Anthem purchasing Cigna both within the last couple months, this will mean even less competition for health insurance at a time when more competition is what is needed. If both these mergers pass regulatory approval, consumers will not have as many choices when it comes to health insurance options. In a recent Forbes article, it quoted supporters of the deal saying: Aetna and Humana and supporters of the deal say the larger insurer would allow the plans to extract price cuts from doctors and hospitals, which would be a good thing. Yes, it would be a good thing if costs came down, but as I noted above, in no way do I believe that insurers would pass those costs savings onto customers through lower premiums. Closing Thoughts In closing, I believe the iShares U.S. Healthcare Providers ETF is worth considering adding to portfolios because of its 50%+ allocation to health insurers, which have strong tailwinds given that it is likely Obamacare is not going anywhere anytime soon. With significantly higher sales growth rates than the rest of the S&P 500, the potential for higher margins because of cost controls and less competition, it is easy to see that health insurers will continue to be highly profitable and a great option for those looking to offset premium increases. The statement from the Aetna CFO says it all: We grew operating revenue to a record quarterly level of over $15.1 billion, driven by higher premium yields and year-over-year growth in medical membership. – AET Transcript Disclaimer: See here . Scalper1 News
Scalper1 News