We have not made any changes to our fair value estimates of healthcare stocks.
By Damien Conover, CFA | 11-09-16 | 12:39 PM | Email Article

The presidential election of Donald Trump combined with the Republicans retaining majorities in Congress leads to greater uncertainty for healthcare stocks. While Trump and the Republicans have been clear on the desire to repeal the Affordable Care Act, there is less clarity on their healthcare policies, except for the focus on reducing regulations. We suspect as plans take shape to repeal the ACA, the likely outcome will be more of a modification than a complete repeal as several groups have benefited from the legislation.

Damien Conover, CFA, is director of healthcare equity research and equity strategy for Morningstar.

If the ACA were repealed, the outcome will likely mean a lower demand for healthcare combined with less industry fees and profit restrictions. The passage of ACA was largely a compromise with industry stakeholders, mandating increased insurance coverage in return for lower costs. Reversing this mandate is largely a net neutral to the healthcare sector, with the drug, biotech, and insurance industries slightly benefiting, hospitals and drug supply chain firms negatively impacted, and the remaining industries less influenced.

On stock valuations, a repeal of the ACA would create some changes to healthcare fair values, but without clarity on the Republican plans, we have not made any changes to our fair value estimates. The drug industry would likely lose some volume gains as the close to 20 million newly insured patients from the ACA will likely lose some insurance coverage and spend less, but the mandated costs of ACA would likely more than offset the lost revenue. Similarly, for managed care organizations, the increased profitability without ACA restrictions would likely more than offset lost volumes. However, hospitals would face challenges due to the likely reversal of the declines in uncompensated care and higher volumes from the newly insured patients. Also, drug supply chain firms from Pharmacy Benefit Managers to drug distributors would face headwinds due to the lost benefit of drug demands from the newly insured patients. 

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Damien Conover, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.
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