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Health Care ETF Doomed As The Reality of Obamacare Gets Closer?

April 23rd, 2013

healthcare etfsDavid Zeiler: When the Supreme Court upheld the Obamacare law last year, many pundits set about predicting the winners and losers among healthcare stocks.

Now that full implementation of the Affordable Care Act is less than a year away, it’s starting to look like the law will produce mostly losers.

Fallout from Obamacare has had a negative impact on the first-quarter earnings of many healthcare companies, a bad sign with so much time left before the law hits full force.


So far, we’ve seen disappointing reports from healthcare stocks in areas as diverse as medical testing, hospitals, insurers, and medical device makers.

“It’s still early in the reporting season, but so far, it all points to softness,” David Heupel, senior healthcare analyst at Thrivent Investment Management, told Reuters.

Why Use of Non-Emergency Medical Services is Declining

One troubling trend that has become apparent in the earnings reports is a decline in the use of non-emergency medical services.

One of the early consequences of the Obamacare law has been employers switching workers into high-deductible plans to cope with some of its costly new requirements.

Those high-deductibles force employees to pay more up-front healthcare costs – and many people are postponing some medical care as a result.

In its earnings report, Kimberly-Clark Corp. (NYSE:KMB) noted that surgical admissions were down 4%, while Johnson & Johnson (NYSE:JNJ) said its U.S. surgical sales were down 10.5%.

The bad news hasn’t hurt these healthcare stocks – at least, not yet – but it has hit some others.

Hospital operator HCA Holdings Inc. (NYSE:HCA) shares are down about 1.5% after the company issued a warning last week about falling admissions in the quarter.

Quest Diagnostics Inc. (NYSE: DGX) missed expectations when it reported Q1 earnings last week and has since sunk 4.5%. Two of the biggest reasons, Quest said, were weakness in healthcare utilization and lower Medicare reimbursements.

“We’ve been seeing very similar trends come out that suggest utilization, which had started to pick up steam in the second half of 2012, seems to be sort of decelerating in the first quarter,” Morningstar analyst Debbie Wang told Reuters.

Health Insurance Companies See Weakness Ahead

More chilling was the news that emerged from last week’s earnings report from UnitedHealth Group Inc. (NYSE:UNH), the nation’s largest healthcare insurer and a bellwether for the sector.

Insurers were supposed to be among the healthcare stocks to benefit from Obamacare – they stood to gain millions of new customers – but UnitedHealth’s results indicate that other aspects of the law will offset any gains.

UnitedHealth managed to beat expectations by 2 cents, but earnings fell 11% year-over-year – the first such drop in several years.

The company blamed lower Medicare reimbursement rates, saying reductions in the Medicare Advantage and Part D programs will cost it $250 million to $300 million over the course of this year.

The hit is a combination of sequestration and Obamacare, causing management to voice pessimism about how the government cutbacks would affect the company’s performance into next year.

“We did not expect the fastest-growing, most popular and most effective of the Medicare benefit options serving America’s seniors would be underfunded to this extent in 2014 – particularly with the backdrop of the already existing ACA mandates and sequestration,”  CEO Stephen Hemsley said in a conference call with analysts.

UnitedHealth stock is down 4.7% since that announcement.

Things could get dicier in the months ahead, as more unintended consequences of Obamacare could pressure health insurance stocks and other healthcare stocks in unforeseen ways.

That’s not to say healthcare stocks are doomed, but the sector will have a shroud of uncertainty around it at least through the end of the year, and possibly well into 2014, as the nitty-gritty details of Obamacare play out.

And given that the sector has outperformed the rest of the market – the Health Care SPDR ETF (NYSEARCA:XLV) is up 28.5% over the past year – investors simply need to view healthcare stocks with caution as the reality of Obamacare gets closer.

Money MorningWritten By David Zeiler From Money Morning

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