Soon after the Affordable Care Act (ACA), also known as Obamacare, was passed several years, winners among healthcare sector and industry exchange traded funds started emerging. One of those winners was the SPDR S&P Health Care Services ETF (NYSEArca: XHS).
However, that also makes an ETF like XHS vulnerable to Republican efforts to repeal Obamacare. Hospital stocks were seen as big winners under Obamacare because with more Americans having access to health insurance, hospital operators would be able to be compensated for more procedures and services while providing fewer services for free.
Additionally, the actuaries calculated that around 8.4 million Americans became insured in 2014 and noted their increased use of medical services. The number of people on Medicaid is projected to increase to 78.1 million by 2024, outstripping Medicare, which is expected to have 70.3 million enrolled.
The uninsured rate has declined significantly since late 2013, before the the ACA, or Obamacare, took effect. More Americans gaining access to health insurance could bolster the long-term thesis for ETFs such as XHS. But efforts to repeal Obamacare challenge that investment thesis.
“A loss in the number of insured provided by ACA policies such as Medicaid expansion and the individual mandate would be credit negative. Eliminating these policies may lead to an increase in uncompensated care and bad debt, placing pressure on top-line revenue,” according to a Moody’s Investors Service note posted by Amey Stone of Barron’s.
XHS and the rival iShares U.S. Healthcare Providers ETF (NYSEArca: IHF) slumped in late 2015 after health insurance giant UnitedHealth Group (NYSE: UNH) revealed plans to withdraw from Obamacare exchanges.
Looking ahead, in the years through 2024, spending growth is projected to average 5.8% and peak at 6.3% in 2020.
“The negative effects could be short term if the Trump administration were to implement proposed reforms such as removing barriers to the sale of interstate insurance, allowing individuals to roll over health savings accounts, and giving individuals the opportunity to deduct health premiums from their personal income taxes. If implemented, these reforms offer large incentives for individuals to purchase insurance from private health plans,” according to the Moody’s note seen in Barron’s.
For more information on the healthcare sector, visit our healthcare category.