The future is bright for the healthcare sector – and there’s one main reason.
“Healthcare is going to continue to see extraordinary demand for products and services, driven by […] the aging population, by increasing wealth and by this amazing innovation we’re seeing across the board,” says Ann Gallo, senior vice-president and partner at Wellington Management Company in Boston, Massachusetts.
That rise in demand will create investment opportunities.
“Patients with the most complex, intensive, chronic diseases [cost] hundreds of thousands of dollars per year,” notes Gallo,whose firm manages the Renaissance Global Health Care Fund. “A whole industry is forming [because] these people are such high cost that it makes sense to provide 24/7 care.”
One example is Landmark Health, says Gallo. That’s a private company that provides home-based medical care, saving U.S. managed care companies tens of thousands of dollars yearly.
The company is “looking for ways to more cost-effectively care for [the] portion of the population that’s only going to grow in size,” says Gallo, whose team chose to invest in the company based on that mandate.
Still, she finds managed care can be “very service-intensive.” To help deal with that, Gallo forecasts, you’ll see an increase in new types of technologies that will be “introduced and rolled out in an attempt to reduce the cost.” An example is home diagnostics for at-home monitoring.
“We’re very early on in that trend,” she says. “Products and services [like that] are going to become great investment opportunities over the next couple of decades as populations continue to age.”
Upside for managed care companies
Of the five largest U.S. managed care companies — Aetna, Anthem, Cigna, Humana and UnitedHealth — “United has been a very large position for us and will remain one,” says Gallo.
Her positions in the other four have fluctuated. About two years ago, she says, “We started selling down our ownership in the other four companies because they had run up on speculation that they were going to be merging with each other.” There were rumours that Aetna would merge with Humana, and that Anthem would join forces with Cigna.
And, sure enough, “The mergers were announced […] and the stocks kind of went sideways. And, thankfully, we had sold our shares,” says Gallo.
The tide turned, however, when the mergers were held up by the U.S. Justice Department and then nixed in early 2017. At that time, says Gallo, “We made large investments in a basket of these companies.” People were ignoring the fundamentals due to the merger news, she adds, and that was a mistake.
Alongside solid fundamentals, she finds “premiums are increasing at or in line with medical costs,” and these large companies will benefit from scale as consumer demand increases. They also benefit from low regulatory risk because they’ve withdrawn from the Affordable Care Act, currently being overhauled by the Trump administration.
Further, says Gallo, “These companies had been out of the market for two years, unable to buy back their stock or make any big capital decisions.”
The final reason she’s reinvested in these companies is they’re part of the solution to rising healthcare costs.
Says Gallo: “We have to find a way to pay for the healthcare system we want, not the one we have. And these companies are the only ones with the tools and the mission of helping us do a better job paying for what we want.”
She describes managed care as “a very large portion of the portfolio.” Since her firm reinvested, “the stocks have done very well. […] We’re maintaining our large bets.”