Why Health Care Is Still a Winning Sector

Why Health Care Is Still a Winning Sector


The irrefutable expansion of American health care has been a boon to investors, who have been reaping the benefits in stocks, mutual- and exchange-traded funds in the sector.

Health care stocks have outperformed the S&P 500 Industrial Index over the last three and five years and continue to outpace the broad-based average.

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For the past half-decade, a Standard & Poor's index of health care stocks has posted a 23 percent annualized return, compared to 18 percent for the S&P 500. Over the past year, health care stocks have widened their lead by nearly four percentage points (through June 10), according to S&P Dow Jones Indicies.

For all the battles over Obamacare and the future of American health care, the sector has continued to grow. The health care industry produced 34,000 jobs in May alone, according to the latest jobs report from the Bureau of Labor Statistics. That was the largest month-over-month gain since August of last year. Job creation has been on a steady clip in defiance of the meltdown of 2008 and ensuing recession.

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Going back to January of 2011, monthly job growth in health care has hit double-digit increases in all but four quarters during that period. Most of the growth has been in ambulatory care (doctor's offices), outpatient, and home health care. With the Affordable Care Act insuring more than 12 million Americans, demand for these services is expected to increase further.

Despite the GOP's myriad votes to derail the Affordable Care Act, which was championed by former House Majority Leader Eric Cantor, Obamacare has created thousands of jobs — and promises to create even more. What was billed by GOP leaders as the "job-killing health care law" has had the opposite effect, at least in this sector. Since 2010, when the ACA was passed, about 1 million industry jobs were created.

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While many of those positions were likely due to increasing services for the elderly and baby boomers, the industry has been on an upward trajectory for most of this century; health care was gaining some 25,000 jobs a month prior to the ACA's passage. 

The growth in health care is so robust that 21 out of the 30 fastest-growing employment categories are in health care.

"With the aging of the baby boomers and now universal coverage, the demand for health care services – whether they're preventive, whether they're chronic or whether they're just regular, and including physical therapy and everything else – it's just going to grow," Stuart Hoffman, chief economist for The PNC Financial Services Group, told US News earlier this year.

The durability of rising health care employment is mostly due to demographics. Some 10,000 baby boomers are turning 65 every day — a trend that will continue for the next 19 years, according to Pew Research.

It's unlikely that the first post-war generation will demand less in the way of health care services than their parents; if anything, they are demanding more because of an ever-expanding array of new diagnostics, drugs, and procedures. That bodes well for job prospects in health care, but probably is bearish if you're concerned about cost containment.

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The main beneficiaries of this continuing health care expansion? Pharmaceutical companies, which will be able to sell more drugs to more patients. Drugs are also seen as a more cost-effective way of treating a variety of maladies. Leading this sector are well-known companies such as Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), and Merck (NYSE: MRK).

Since Obamacare essentially provided a spate of new business for private insurers, health insurance companies are also benefiting. Companies like Unitedhealth Group (NYSE: UNH), Aetna (NYSE: AET) and Wellpoint (NYSE: WLP) also gained new customers.

Several sections of the ACA also promoted cost-savings programs such as Accountable Care Organizations and imposed penalties for frequent hospital readmissions. The ACA also provided generous funding for digitizing medical records, which has long been a problem in the industry and partially responsible for medical errors. Companies like Allscripts Health care Solutions (MDRX) and ExpressScripts Holding (ESRX), for example, provide services such as pharmacy benefit management, which pool data to get the best prices on pharmaceuticals.

Ultimately, health care providers that can better marshal their resources to keep people healthy through improved and more efficient care — and keep them out of hospitals — will also see dividends.

Health care providers may further benefit from an expansion to Medicaid in states where GOP governors refused to take federal funds to enable more residents to qualify for the program. Some 24 states are in this camp, impacting nearly five million Americans.  

The political climate will probably not sidetrack the health care industry expansion. Keeping the present system in place and expanding it has been unquestionably good for business. As the midterm election season gets frothier, it's unlikely that candidates — no matter how fiery their rhetoric — will want to dramatically alter that model.

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