By John Wasik
CHICAGO Oct 28 In the shadow of the bungled
rollout of the U.S. Affordable Care Act health insurance
exchanges, a handful of companies are quietly profiting from the
biggest expansion of healthcare since Medicare in the mid-1960s.
Companies that were supposed to be collateral damage from
the new wave of ACA regulations have become Wall Street
darlings. Those that specialize in health records technology,
insurance and pharmaceuticals will benefit from the need for
more drugs, medical services and policies through the state and
In its first weeks, the ACA healthcare exchange websites
were swamped with more than half a million Americans applying
for insurance, with more than 19 million visiting the federal
site alone. Despite numerous technical roadblocks, those strong
traffic numbers bode well for companies that benefit from
selling new policies along with the Medicaid expansion that is
part of the new health law.
"ACA is here to stay," says Alex Gurvich, a portfolio
manager for the Rockledge Group in New York. "It will go through
some changes, but the fundamental valuations support
outperformance in the healthcare sector. A lot of companies did
poorly coming up to the ACA rollout, but it turned to be the
other way around."
The most obvious beneficiaries have been mega-insurers such
as UnitedHealth Group Inc, whose shares at Friday's
close were up more than 22 percent over the past year. That is
nearly 5 percentage points better than the Standard & Poor's 500
Less-visible plays such as WellPoint Inc, which
operates under Blue Cross/Blue Shield licenses in 14 states,
have also done well. The stock is up 37 percent over the past
Why have private insurance companies done so well when the
focus is on public exchanges offered through the ACA? Because
the healthcare law provides a conduit to private insurance,
along with consumer protections that eliminates discrimination
for pre-existing conditions.
The prospect of adding up to 30 million new customers
through the public exchanges will also lead to purchases of
technology and medical equipment. To offer competitive rates to
millions of Americans, insurers and providers alike will need to
invest in cost-effective software and hardware that automates
everything from billing to medical records.
The medical equipment and healthcare provider subsectors
appear to be undervalued at present, according to Gurvich.
For example, shares of Express Scripts Holding Co,
which offers healthcare administration and management services,
are in bargain territory with a forward price/earnings ratio of
12, compared with 18 for the S&P 500 and 24 for the healthcare
sector. Still, the stock is up nearly 13 percent year to date.
Rather than just a handful of stocks, though, an entire
portfolio that holds insurance, technology and pharmaceutical
companies makes for a more diversified sampling of the sector.
The iShares U.S. Healthcare Providers ETF is a good
place to start. It reflects the Dow Jones U.S. Select Healthcare
Providers Index and costs 0.46 percent annually for management
The fund, which owns insurers such as Aetna Inc,
Humana Inc and service companies such as Quest
Diagnostics Inc, is up 27 percent over the past year.
A worthy alternative is the Vanguard Health Care ETF
, which rose nearly 35 percent in that time and costs
much less to own than the iShares fund - 0.14 percent annually.
The Vanguard fund has a much more concentrated focus on
pharmaceutical and biotech stocks, with its top holdings in
mega-cap companies like Johnson & Johnson and Pfizer Inc
Since the full ACA rollout will occur over the next several
years, managers like Gurvich see the U.S. healthcare sector
thriving for the foreseeable future. Not only is it in a growth
mode, but it also is a solid, defensive play as the country
There is no glitch in that scenario.