While just about all healthcare stocks seem to be getting a boost from the Affordable Care Act (ACA), otherwise known as Obamacare, one subgroup - the health insurers - figures to get an outsized benefit from the healthcare law.
And their stocks are already reflecting this advantage.
In the past six months, the iShares Dow Jones U.S. Health Care ETF (NYSEARCA: IHF), which owns all of the Big Five insurers - Aetna Inc. (NYSE: AET), Humana Inc. (NYSE: HUM), WellPoint Inc. (NYSE: WLP), Cigna Corp. (NYSE: CI), and UnitedHealth Group Inc. (NYSE: UNH) - is up more than 11% year to date.
All five are trading just under their all-time highs.
So far this year, the sector is up over 10%, while the Standard & Poor's 500 index is up just 7.5%. Last year, as investors were anticipating the official launch of Obamacare in October, the healthcare sector rose 39%, second only to consumer discretionaries.
And according to Thomson Reuters, the profit estimates for healthcare stocks this year have increased to 12.2% from 8.3% as of Jan 1, while the forecasts for most other sectors have declined.
All this is before the ACA is even fully implemented.
In fact, if you take a step back, you can see that the health insurance stocks have been steadily rising since the ACA was signed into law in March of 2010. The iShares Health Care ETF, for example, is up nearly 97% in that span, well above the 70% gain for the S&P 500.
So, yes, the health insurance industry is definitely in the pink right now. But how can investors be sure Obamacare will keep healthcare stocks flourishing?
Well, because the health insurance industry planned it that way...
How Obamacare Will Feed the Profits of Healthcare Stocks
As the ACA continues to unfold - it won't fully come into effect until 2020 - it's becoming increasingly evident that the health insurance company lobbyists did a great job of ensuring the law would pump up their profits...
Think about it. Have you heard much griping about Obamacare from the CEOs of the health insurance industry, or for that matter, any of the healthcare stocks?
The health insurance industry took no chances while the ACA was being crafted in Washington.
According to OpenSecrets.org data, Blue Cross/Blue Shield spending spiked from about $10 million a year from 2005 to 2007 to over $16 million in 2008 and then to $22 million ever since. Other health insurers, such as Aetna and Humana also doubled their lobbying budgets while Obamacare was being written.
And - surprise! - we ended up with a law that requires people, for the first time in the nation's history, to purchase a product from private industry. What's more, if people can't afford that product, they receive a government subsidy.
"The fact is, the insurance companies are filled with experts who knew the law inside and out and knew all along that they could find a way to profit from it," CNBC columnist Jake Novak wrote in a recent commentary.
It's almost too good to be true. What industry wouldn't be thrilled to have the purchase of their product mandated by law and the cost subsidized by the government?
The funny part is that President Barack Obama and the other Democrats who created the ACA made the insurance companies out to be greedy, heartless villains that the new law would rein in.
But behind closed doors they were cooperating with the lobbyists from those insurance companies - and getting snookered in the process.
Why Health Insurance Stocks Will Keep Rising
Let's just take one example that's been much talked about lately - the complex system designed to offset the losses the insurance companies might incur as a result of taking on sicker customers likely to use more health services.
Here again the health insurers engineered a terrific deal at the expense of the government (and, ultimately, the taxpayers.)
The costs of these sophisticated backstops were supposed to be borne mostly by the insurance companies, with those who fared better essentially subsidizing those who suffered losses. That would have kept it plan cost-neutral, as was intended.
But for 2014, it looks like nearly all of the health insurers plan on getting at least some aid, with only a handful expecting to contribute to the fund. That means a whopping $900 million deficit that will have to be covered by the American taxpayer.
See the pattern? The health insurance companies have lots of built-in protections against whatever may go wrong with Obamacare, but plenty of ways to squeeze fresh profits out of the law.
Note that just last week Moody's expressed optimism about the credit ratings of the health insurers based on the fact that most are raising their rates for 2015. Higher rates will equal higher profits.
No wonder these healthcare stocks are near their all-time highs.
While no one can say with 100% certainty that these trends will continue, from what we've seen so far the health insurance companies did a masterful job of making sure that Obamacare would serve their interests over the long term. The odds are high these healthcare stocks will continue to prosper.
Maddening, yes. But don't let that stop you from earning some healthy profits of your own.
Have you added, or are you planning to add, healthcare stocks such as the big health insurers to your portfolio? Tell us what you think on Twitter @moneymorning or Facebook.
UP NEXT: Another good reason to invest in healthcare stocks is to offset the rising costs of health insurance that are coming, courtesy of Obamacare. These healthcare industry officials are predicting that premiums in 2015 are going to "skyrocket"...
Related Articles:
- CNBC: An Obamacare Bailout? Insurers Already Got One!
- Reuters: U.S. Healthcare Profit Outlook Brightens on Obamacare, Drug Prices
About the Author
David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.
Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.
Dave has a BA in English and Mass Communications from Loyola University Maryland.