The Biggest Reasons Why Healthcare Is the Worst-Performing Sector of 2019

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Volatility has rocked healthcare stocks more than any other group this year, and their performance looks even worse when compared to the massive rally last year. In 2018, U.S. giants like UnitedHealth Group Inc. (UNH) and Humana Inc. (HUM) soared 13% and 15.5%, demolishing the broader S&P 500’s 6.2% loss.

But now, major healthcare firms have seen double-digit losses this year, with UNH’s 11.3% decline in 2019 on track to erase all of last year’s gains on top of the sector’s abysmal performance Tuesday. Investors are not only wondering if the sector will ever rebound but also wondering exactly why the rout has been so prolonged in the first place.

Here’s why healthcare companies took an even bigger dive today – and why they’re currently in a state of crisis…

The News

Healthcare’s broad decline came not from specific news on Tuesday but instead from a continuation of the broadly negative political sentiment surrounding the industry. Investors have grown increasingly scared that the sector will start to experience tighter government regulation, causing health insurers’ bottom lines to suffer as a result.

Many Democratic candidates for the 2020 presidential election have had no reservations about placing U.S. healthcare giants – historically known for gouging drug prices and overcharging on insurance plans – right in their crosshairs. This sentiment most recently manifested itself in the Medicare for All bill unveiled in February entailing that the government cover every American’s healthcare costs and expand Medicare coverage to younger people.

While 107 Congressional Democrats cosigned the bill as a show of optimism, the private sector remains unpleased over the prospect of a federally controlled healthcare industry. In his earnings call Tuesday, UnitedHealth Group CEO David Wichmann made a point of saying the new bill would “surely jeopardize the relationship people have with their doctors, destabilize the nation’s health system, and limit the ability of clinicians to practice medicine at their best.”

How Investors Reacted

Several of the most prominent U.S. healthcare stocks endured heavy losses on Tuesday, with six of the S&P’s 10 biggest losers being healthcare companies. The index’s worst performers were all in the healthcare sector: HCA Healthcare Inc. (HCA), Cigna Corp. (CI), Humana, Anthem, and Centene Corp. (CNC). Their stock prices fell 10%, 7.8%, 7.4%, 6.75%, and 5.9%, respectively. The sixth that lost slightly less was Universal Health Services Inc. (UHS), which dropped 4.8% on the day.

The other notable decliner was UnitedHealth, the world’s largest healthcare firm by revenue of more than $220 billion last year. Shares of UNH stock lost 4% on Tuesday to close at $220.96.

The Bigger Picture

The Medicare for All bill marks just the latest cannonball the government has fired at pharmaceutical and healthcare companies. While this war has been going on for years now, it’s likely to become even more politically complicated as the field of Democratic candidates expands and progressives – including Beto O’Rourke and Bernie Sanders, among others – intend to check the power on healthcare firms.

The pharmaceutical and healthcare sectors – which, for the most part, have mutually beneficial relationships so strong that they’re typically considered analogous – are widely seen as harmful to the public. Many view these companies as a capitalist barrier to achieving the “universal human right” of free healthcare, but others see them as downright vicious. Martin Shkreli, who raised the price of HIV/AIDS drug Daraprim by more than 5,400% and was sentenced to prison for securities fraud, remains emblematic of the healthcare industry’s predatory reputation.

Yet while people often view left-wing politicians as the ones attempting to curtail profits, the issue of unfair drug profits has reached across the aisle on more than one occasion. In February, President Trump called on Congress to ban “backdoor deals” that pharma firms make with middlemen like CVS Health Corp. (CVS) – referred to as pharmacy benefits managers (PBMs) – to pay them rebates on preferred drug plans. Health and Human Services Secretary Alex Azar explained the problem by calling it a system “set up in the shadows” that allows for no transparency and allows for PBMs to receive “billions of dollars in rebates without patients ever knowing where the money goes.”

The cloud hanging over the healthcare sector has not gone unnoticed by investors. It’s the worst-performing S&P sector so far in 2019, up a negligible 3.8% compared to the broader index’s 16% gain. The losses come on the heels of revised forecasts from firms like CVS and Walgreens Boots Alliance Inc. (WBA), which cut their annual earnings projections on expectations that their bottom lines will take a beating from Trump’s new ban.

Many analysts and financial advisors also maintain a bleak financial outlook for the industry. Brock Moseley, who founded wealth manager Miracle Mile Advisors, told the Wall Street Journal that “investors are scared about the massive amount of uncertainty in terms of regulation.” He went on to say, “these challenging trends do give us some worry” due to the fact that there’s “a critical eye around the health-care space and drug pricing.”

Looking Ahead

Healthcare stocks appear to be stuck between a rock and a hard place: the rock being Congressional Democrats, and the hard place being Republicans. Both sides obviously don’t agree on too many issues very often, which makes the case of tighter regulation on healthcare and pharma firms all the more terrifying for investors’ pockets.

While the chances of the overly optimistic Medicare for All passing a divided Congress are slim to none, healthcare stocks may experience more downside in the near- to medium-term before experiencing a rebound. Investors should take a wait-and-see approach to the sector, eyeing opportunities to buy the dip for the bigger, more expensive companies.

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