One of the earliest reactions of equity investors, on the election of Donald Trump as president of the US, was to buy health insurers and to sell companies that operate hospitals.
In broad terms, repealing Obamacare looks good for the former and bad for the latter. Reform would remove some of the coverage obligations on the insurance companies, who say they have struggled to offer plans profitably under Obamacare, while axing the requirement for Americans to have healthcare and rolling back government spending on health, which would rob hospitals of customers.
A wide divergence opened up between these two subsectors. The insurers, represented by the S&P 500 managed healthcare index, are up 17 per cent since election day, outperforming the 10 per cent gain of the wider US stock market. The S&P 500 healthcare facilities index, made up of two large hospital companies, has completely missed out on the market rally and is flat.
That 17 percentage point gap in the post-election performance of the two subsectors is narrower now than it was at its widest in December, when it hit 24 points, but it has crept up from 13 points when the Republicans published their reform bill this month. It has widened and narrowed depending on the news from Capitol Hill and the perceived likelihood of reform passing into law.
That seems likely to continue as long as the political debate rages, but it represents a potential trap for investors. Locking oneself into a particular trade ignores how fundamental pieces of the proposed legislation have kept switching. It ignores, too, the Trump administration’s assertion that a healthcare bill is only one of three legs to reform (the others being executive action and then a second set of legislative patches).
What gets given to insurers with one hand could get taken away with another, if the administration moves to intensify competition in the market; what gets taken away from hospitals could be returned to them with other regulatory fixes or state-by-state actions.
Investors would be wise to remember that the most important healthcare law in the US is the law of unintended consequences.