Whenever “Medicare For All” hits the headlines, healthcare stocks hit an air pocket. With Sen. Bernie Sanders now leading the field of Democratic presidential candidates, my managers — who invest with a three to five-year horizon — have been discussing how his proposal affects our portfolios. Here’s what we think.
Sanders Has A Lot Of Support
H.R. 1384, the Medicare for All Act of 2019, is sponsored by Rep. Pramila Jayapal and has 108 co-sponsors.
In the Senate, S.1804, the Medicare for All Act of 2017 sponsored by Sen. Bernie Sanders in the previous Congress, had 16 co-sponsors including current Democratic presidential candidates Sen. Cory Booker, Sen. Kristen Gillibrand, Sen. Kamala Harris, and Sen. Elizabeth Warren.
With the support of so many elected officials and presidential candidates, investors can expect increasing media attention on this topic as the 2020 election heats up, which means healthcare stocks will hit more air pockets in the next 19 months. However, not all healthcare stocks will be affected in the same way.
Most Vulnerable Stocks
One of the consequential sections of H.R. 1384 is also one of the shortest. It’s worth quoting:
SEC. 107. PROHIBITION AGAINST DUPLICATING COVERAGE. (a) In General.—Beginning on the effective date described in section 106(a), it shall be unlawful for—
(1) a private health insurer to sell health insurance coverage that duplicates the benefits provided under this Act; or
(2) an employer to provide benefits for an employee, former employee, or the dependents of an employee or former employee that duplicate the benefits provided under this Act.
In plain english, this means that health insurance as we know it now will be illegal. Therefore, the companies with the most to lose are health insurance companies.
The largest health insurers in 2018 were UnitedHealth, Anthem, Aetna, Cigna, Humana, Centene, Molina, and WellCare. We expect the stocks of these companies to hit more and more air pockets as the election draws near, particularly if the Democratic presidential nominee appears likely to win. However, no one thinks these air pockets will be good opportunities to buy these companies.
Less Vulnerable Stocks
The topic of drug prices is not directly addressed by H.R. 1384 so its passage will have less of an impact on pharmaceutical and biotech companies.
Now, there are many other proposals to address the rising cost of drugs. Some of them have bipartisan support so they could pass even if H.R. 1384 is never enacted.
Nevertheless, when the healthcare sector hits an air pocket due to Medicare For All, there may be buying opportunities for pharmaceutical and biotech stocks that are less vulnerable.
My Take: When negative news hits the headlines, a lot of people sell first and ask questions later.
These episodes are often times when great investors with a three to five-year horizon buy stock. However, if you wait until the bad news hits the headlines, you don’t have time to research what stocks to buy. That’s why it’s important to discuss potentially market moving events well in advance of the bad news.
This article is part of a series I write for those who want to get their portfolios back on track. To be notified when the next installment is published, click here.