You might not like Obamacare, but the stock market sure seems to.
Pittsburgh is largely a non-player when it comes to publicly traded health companies, because most of the region's major health care institutions traffic in the nonprofit realm. But across the country, health insurance stocks are hot, hospitals prices are surprisingly resilient, biotech and pharmaceutical stocks are surging, and ancillary companies that support the health sector -- such as Accenture and TeamHealth -- are popular buys.
"I think there's probably still room to go on this," said Keith Summers, portfolio manager at Tricoastal Capital, of Buffalo. "The earnings growth [still] seems to be there. ... Of all the places you could be putting your money in the world right now, health care is a pretty good place."
In some ways, the sector's good fortune seems counterintuitive: All sectors of the industry are under stress, thanks to various provisions of the federal Affordable Care Act that seek to wrestle with health costs, hospital performance and health insurer profit margins. Hospital and prescription use is flattening. There's belt-tightening all around.
Yet the sector is doing well under that financial stress. Through the first six months of 2013, by the Standard & Poor's 500 index's accounting, "It's the best-performing sector year-to-date," said Jim Russell, senior equity strategist with U.S. Bank Wealth Management Group.
That hasn't happened in decades.
Take the country's major for-profit insurers. Collectively, Cigna, UnitedHealth Group, Aetna, WellPoint Inc., Humana and Coventry Health Care Inc. raked in impressive profits in 2012, and the stock price for each is up during the first five months of 2013 (except for Coventry, which as of May, is officially part of Aetna and isn't traded on the stock market).
Hospitals remain the riskiest bet of the bunch. Yet the subsector has appeal, partly because the efficiencies required by the Affordable Care Act are fueling hospital merger-and-acquisition talk.
Just last week, LifePoint Hospitals Inc., one of the country's biggest hospital companies, hit a 52-week high. Health Management Associates, a hospital chain that operates in the South, has seen its stock price spike in recent weeks on speculation that it may be sold. Its price is up 30 percent year-to-date.
Tenet Healthcare, Community Healthcare Systems and others saw prices jump this spring when the U.S. Centers for Medicare and Medicaid Service announced the government would boost Medicare Advantage payments to hospitals, reversing a planned 2.2 percent payment cut.
Insurance stock trading also surged on the news, even in advance of the April 1 announcement. That has prompted the U.S. Justice Department and the Securities and Exchange Commission to investigate whether Wall Street knew about the Medicare funding plan before it should have, tipped off by Department of Health and Human Services employees.
Hospital-support companies, such as Tennessee's TeamHealth Holdings Inc., which provides emergency room physician staffing to about 800 hospitals, are also popular buys -- partly because as hospitals trim costs, they often look to outside staffing. TeamHealth's stock price is up 30 percent year-to-date.
Meanwhile, pharmaceuticals and biotech stocks have had a string of good luck, and good news: Clovis Oncology's share price more than doubled in June after making a promising "phase one" announcement regarding its new ovarian cancer drug. Acadia Pharmaceuticals is up 56 percent over the last month after revealing a new investor and announcing that one of its business partners was working on a new glaucoma treatment.
Pharmaceuticals will continue to be popular plays as long as inflation and interest rates remain stagnant, Mr. Russell said.
"Pharm stocks are up because not because they are great growth engines, but because they pay great dividends," between 3 and 4 percent. "That's an awfully appealing yield in today's low-growth, low-interest-rate environment."
Partly, the health sector's surge can be credited to plain old volume. If Obamacare works as promised, in 2014, millions of Americans will become new customers in America's health care system. That means millions more patients for hospitals, millions more policyholders for health carriers, and millions more consumers of prescription drugs.
The reason that investors are shifting toward health stocks is the same reason consulting companies are beefing up their health lines. Accenture, a global management and outsourcing company and a partner to Pittsburgh's Highmark Inc., splits its work among various sectors, but its health and public services unit is its fastest growing business line, with growing operating margins, too. Accenture's stock price is up 21 percent year-to-date.
The good times may not last long, however.
A May analysis from Fitch Ratings predicts that while "the health insurance expansion elements of the ACA might provide a temporary boost to utilization, it will not be a panacea for slowing growth. ... Without an obvious catalyst for a recovery in weak organic growth, health care providers must instead look" elsewhere for improved profits, in 2014 and beyond.
"The potential [hospital] profits from higher volume will be cut into by price reductions," said Mervyn Hecht, investment attorney and author. Already, hospitals' operating margins are being pinched by sequester cuts, and their performances are more subject to geographic constraints.
Pharmaceutical companies, in theory, have no such worries -- people buy drugs in the U.S. and in emerging economies, too.
Mr. Russell said the insurance companies in particular may be close to topping out. "Stock prices always look forward," he said. "The insurance companies have captured most of the gain" from the expected boost in policyholder traffic that will come Jan. 1, 2014.
Bill Toland: firstname.lastname@example.org or 412-263-2625.