Health Care ETFs In Focus After Historic Vote

by on March 22, 2010 | ETFs Mentioned:

The U.S. House of Representatives worked late into the night on Sunday to pass historic health care legislation, capping months of intense debate and dealmaking. Sweeping changes to the nation’s health care system seemed like a done deal earlier this year before a major upset in a special Senate election sent Democrats back to the drawing board. As the scales have swung back and forth and rumors have swirled over the makeup of the final legislation, investors have scrambled to analyze the potential impact on the health care sector. Companies in the health care industry will obviously receive waves of new customers as a result of the legislation, a windfall that the Obama administration used as leverage to negotiate certain fees and taxes on various health care industries.

As previous versions of the health care reform bill swirled around Capitol Hill, investors worried that the legislation could have devastating effects on the bottom lines of health care companies. But as the bill evolved, many of these worries eased as investor became convinced that the surge in paying customers would outweigh any damage done by new fees and more stringent regulations. Most hospitals and drug makers threw support behind the final regulation, and investors have tabbed these two groups as clear beneficiaries of health care reform. Health insurance providers opposed the bill, and seemingly have the most to lose as a result of its passage. “There is no question that insurers would face the most strikingly different business environment, with drastic changes in the way insurance is sold to individuals and small businesses, one of the industry‚Äôs most profitable areas,” writes Reed Abelson. “There would also be much heavier regulation.”

Health Care ETFs To Watch

Several sub-sectors of the health care industry could be hit with new fees under the proposed plan (see a good write-up of those impacted here). In addition to broad-based health care ETFs (such as XLV), there are several more targeted options available to investors, focusing on everything from pharmaceuticals to medical devices (see all ETFs in the Health & Biotech ETFdb Category).

  • iShares Dow Jones U.S. Healthcare Providers Index Fund (IHF): This ETF tracks the Dow Jones U.S. Select Health Care Providers Index, a benchmark that includes operators of health maintenance companies, hospitals, clinics, nursing homes, and rehabilitation centers. Some investors think that the ability of health care providers to bill the government for patient treatment could translate into healthier profits. “Even a small, incremental increase in the number of treated patients in a hospital that instead of becoming an uncollected bill go to government-paid reimbursement is quite beneficial for hospital profits,” says Daniel Chung, manager of the $300 million Alger Health Sciences Fund. IHF posted strong gains late last week, and continued its surge in trading early Monday.

IHF

  • SPDR S&P Pharmaceuticals ETF (XPH): Under the plan sent to the president’s desk, drug manufacturers would pay a total of about $16 billion between 2011 and 2019 to help defray the costs of providing health insurance to all Americans. Many investors believe that health care reform will be an overall negative for the pharmaceutical industry, although the bill may actually lead to fewer generic prescriptions and therefore higher profit margins. Moreover, the number of patients paying for prescription medication will increase dramatically, giving a boost to an industry that has struggled in recent years.

XPH

  • iShares Dow Jones U.S. Medical Devices ETF (IHI): Manufacturers of medical devices would also be impacted by the bill. Beginning on January 1, 2013, medical device manufacturers would have their wares taxes at 2.9%. What remains to be seen is whether this tax will be borne by device manufacturers or passed on to consumers; debate on the burden borne by consumers has raged in recent weeks. Previous versions of the bill included a 5% tax, but rounds of negotiations resulted in a compromised rate of 2.9%. IHI continued to rally on Monday morning, building on gains from last week.

IHI

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Disclosure: No positions at time of writing.