One of the ways that investors reacted to the election of Donald Trump, back in November, was to buy health insurance company stocks and to sell the shares of companies that operate hospitals. In broad terms, repealing Obamacare looks good for insurers since it would remove some of the obligations they have on the coverage that they provide and which they say have made it difficult to offer plans profitably.
Again, in broad terms, repeal looks bad for hospitals. Axing the requirement for Americans to have healthcare and rolling back government spending programmes would rob hospitals of customers. So a wide divergence has opened up between these two subsectors. The insurers, represented by the S&P 500 managed Healthcare index, are up 17% since election day, outperforming the 10% gain of the widest stock market.
By contrast, the S&P 500 Healthcare facilities index, which is made up of two large hospital companies has completely missed out on the market rally. It's flat. That [? 17% ?] point gap in the post-election performance of the two sectors is narrower now than it was at its widest in December when it hit 24 points. But it's crept up from 13 when the Republicans published their reform bill earlier this month. That has been widening and narrowing with every news headline from Capitol Hill that affects the perceived likelihood of reform passing into law.
That's a trade that seems likely to continue as long as the political debate rages. But it's a potential trap for investors. Locking oneself into any particular healthcare trade ignores how, even quite fundamental, pieces of the proposed law have been moving around. More than that, it ignores what the Trump administration has been saying, which is that a healthcare bill would only be the first of three legs to reform. The others are executive action, and then a second set of legislative patches.
What gets given to insurers with one hand could get taken away with another, particularly if the administration moves to intensify competition in that market. And what looks like it's getting taken away from hospitals could be returned to them with other regulatory fixes or by actions on a state or local level. So just a word of caution, investors should remember that the most important the healthcare law in the United States is the law of unintended consequences.