Health Care May Not Be the Stock Haven It Once Was

(Bloomberg Opinion) -- Recession fears and volatility are rearing their heads again, which means investors may look for safe havens.

One path traditionally leads them toward health care, which has often been relatively insulated when equities are shaky and the economy takes a downward turn. People don’t stop getting sick, and safety net programs smooth consumption. America’s aging population means that spending might even increase as other industries suffer. Hedge funds dove into the sector during the first quarter and several of them continued the trend in the second, according to 13F filings. The rotation may accelerate if markets stay rowdy. 

The question is whether this time might be different for investors, given the coming election and calls from Democratic presidential candidates for significant reform. Investing heavily in health stocks requires skepticism about the potential for significant policy change. That’s not a crazy position, but anyone sticking with the sector will need a strong stomach.

The prospects for substantial near-term reform are somewhat limited. A proposed bipartisan Senate drug pricing bill would cap price increases in Medicare. But it’s far from a worst-case scenario for the industry. On the provider side, legislators want to rein in surprise out-of-network bills, a particularly noxious feature of America’s health system. Tweaks to the proposed legislation may drastically reduce its potential impact. While the Trump administration has made a lot of noise about drug and health prices, its track record on enacting anything is not inspiring.   

It seems most likely that something close to the highly profitable status quo will continue through the 2020 election, at least. The most likely avenue to sweeping reform like “Medicare for All” would be for a progressive Democrat to win the party’s primary, go on to win the general election and help the party win a Senate majority. A lot of dominoes have to fall in place for that to happen.

That outcome would become a lot more likely, however, if the recession investors rotating into health care want to protect themselves from looms over the next 14 months. President Trump is already historically unpopular; a softening economy would drag down his re-election prospects as well as those of other Republicans.

Even a small perceived increase in the odds of substantial policy change is likely to hit health stocks; the stakes are just that high. Medicare for All is an existential threat for insurers and would slash profits for a variety of other companies in the world’s most profitable health-care market. 

Pharma fans will recall a 2015 tweet on drug-price gouging from Hillary Clinton, who was running for president, that prompted a sharp drop in the Nasdaq Biotech Index. The index has been clawing its way back ever since, and several candidates want to go further than she did on drug prices. Relatively mild news events like the introduction of a new House version of Medicare for All and a scuffle between insurance giant UnitedHealthGroup Inc. and Bernie Sanders have prompted big sell-offs in managed-care stocks this year. 

Significant disruption may not arrive any time soon even if Democrats sweep into power. The party isn’t united behind Medicare for All. It would be a financial and political lift that would require the party to sideline other priorities, like dealing with a possible recession and the existential threat of climate change. Democrats might not make that choice.

Investors willing to wait out the coming political, economic and regulatory roller coaster may be rewarded. Those seeking a smooth ride should look elsewhere.  

To contact the editor responsible for this story: Daniel Niemi at dniemi1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Max Nisen is a Bloomberg Opinion columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

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