2 ways to invest in U.S. healthcare

Since the introduction of the Affordable Care Act, the U.S. healthcare sector has seen a boost in revenues.

That’s mainly because there are now 16 million additional people who have insurance, and who are using the healthcare system, says Michael Orndorff, vice president and portfolio manager at American Century Investments in Kansas City, Missouri. He co-manages the Renaissance U.S. Equity Growth Fund.

Many more people have enrolled in state-run exchanges, he adds, and there has also been expansion of Medicaid across the country. “So we’ve seen utilization rates at hospitals moving higher […] Admission rates are running at around 4% to 5% now,” compared to 1% to 2% over the past 10 years.

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Overall, says Orndorff, the number of uninsured Americans has dropped from 18% to 12%.

For investors interested in the space, he suggests participating in the growth of the healthcare sector in the following two ways.

• By investing directly in hospitals.
• By investing in companies that provide outsourced emergency room services, such as Team Health.

Since more people have insurance and are accesing healthcare services, says Orndorff, these companies “are getting paid more and there are fewer bad debts they have to write off. Those are positives both in terms of revenues as well as margins.”

Another investing option is to bank on the growth of equipment and consumable providers, he adds. Teleflex, a Pennsylvania-based medical devices provider that Orndorff invests in, is “seeing a nice uptick in terms of revenue opportunities […] They also have a cost-cutting program that’s helping to lift margins.”

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When it comes to reading trends in the sector, Orndorff says investors might need help distinguishing between long-term and short-term trends. For example, while the aging demographic landscape seems to point to increased use of healthcare services over the long-term, there are still cyclical trends to consider as the U.S. economy improves.

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While people have more money in their pockets, insurance deductibles have also risen, says Orndorff. “[As a result,] there’s a requirement for more planning on the part of consumers, especially for those procedures that can be deferred, or for those that are more electable.”

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