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Can You Profit from Health Care?

stock market

…..let’s see…

…it used to be the steel industry…and for awhile it was AT&T

…then in the 90’s, the place to put your money was dot.coms

…is it now health care?

With all the talk lately of economic downturn and recession, in many people’s minds (at least those over 50) lurk the tales of the Great Depression and the infamous 1929 stock market collapse. Heck, we don’t even have to go back that far! Remember the early part of this decade when all the Silicon Valley dot.com stocks plummeted and recently millionaired 25-year-olds found themselves trading in their Porsches for middle management jobs at Starbuck’s?

Many are now wondering, in light of the latest sure thing to get short-sheeted – real estate and the mortgage market – whether the health care industry might be a better investment. In fact, while commercial real estate investment and general office sales sink, medical real estate investment and sales – as in physician office buildings – are growing. As everyone knows, there will always be a demand for health care because we mere mortals will always fall prey to some disease or accident.

Ever increasing health care prices have led some to wonder if the health care industry is the goose that will lay the golden egg perpetually.

Some analysts are touting health care as “recession-proof,” pointing to above average stock climbs in pharmaceuticals, biotech, and health care goods manufacturers and service providers since the total market bottomed-out in 2002.

Hungry investors seem to have sniffed out the feast of spoils health care can provide. There was a 17% increase in health care investment in 2007, rising to almost $10 billion from $8.5 billion in 2006. Biopharmaceutical and medical devices drew a 37% increase, jumping to $5.4 billion invested in 2007 from $3.7 the year before.

Yet as more Americans become uninsured – nearly 1 in 5 to be exact – they are not buying the products insurance companies are selling. Are insurers able to recoup all those market losses by raising their prices for the rest of us?

  • A few weeks ago the mega health insurer WellPoint announced that despite gaining members, its first-quarter profits fell 25% compared with the same quarter last year.
  • This directly followed an admission by United Health Group, the largest U.S. HMO, that it had revised its projected earnings downward, lowering its stock value by 10%. The company lost over half a million members in the first three months of the year and nearly 300,000 Medicare Part D enrollees.
  • On May 1, Cigna posted an 80% drop in first-quarter profits: $58 million compared with $289 million a year ago .
  • Health Net has also recently reported a drop in earnings.

Part of what’s killing these insurers’ bottom line, however, is rising health care costs.

Insurer troubles could have a ripple effect throughout the industry. As insurers raise their premiums and co-pays to cover their costs, Americans avoid the bills they can – the ones that aren’t already subtracted from their paycheck – their doctors and hospitals bills. This means more provider bad debt.

Perhaps the insurer CEOs are the best canary in the coal mine of the health care industry’s wellbeing. Usually these executives are insulated from any industry downturn or even poor performance by the company that they are managing.

  • The former chief executive of nonprofit CareFirst BlueCross BlueShield is being investigated by Maryland’s insurance commissioner for his $17.65 million severance and retirement package.
  • The former UnitedHealth Group CEO is now being forced to give up at least $400 million of his $1.78 billion golden parachute.

That said, health execs don’t seem too worse for wear. Check out these annual salaries: http://www.theindustryradar.com/index.cfm?account=radar&page=Healthplan_Executive_Compensation

For an excellent blog post about how publicly traded HMOs are not making the money from the privatization of Medicare that Wall Street expected, go here.

And stay tuned to What If for a piece on the profitability of hospitals…

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