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Trump Wins Healthcare Vote: ETFs to Watch

Sweta Killa

After struggling for more than a month, President Donald Trump finally secured the necessary votes from House Republicans to pass the bill for repealing and replacing Obamacare with the revised American Health Care Act (AHCA). The bill was passed by a vote of 217 to 213, just one extra needed for passage. This represents Trump’s first successful legislative move and a big victory for his administration.  

However, the fate of the bill is still uncertain, as it requires the Senate’s approval before it goes to Trump for his signature.

Inside The New Bill

The new bill would overhaul the U.S. healthcare system and bring major changes to healthcare coverage for many Americans. This is especially true as the bill allows insurers to charge individuals, who are uninsured for more than two months, a 30% surcharge on their premiums, an incentive designed to encourage people to maintain insurance coverage. It would scrap the requirement of larger companies to provide affordable insurance to their workforces.

The revised bill calls for replacing income-based tax credits with refundable age-based tax credits for affordable insurance. It would offer tax credits of $2,000 per year for those in their 20s to $4,000 for those in their 60s with maximum tax credits of $14,000 a year for a family. Credits would be reduced for individuals making more than $75,000 a year and families making more than $150,000 (read: Healthcare ETFs in Focus on Obamacare Replacement Plan).

Additionally, the new law allows older adults to be charged premiums that are five times higher the premiums charged to younger adults, instead of the 3:1 ratio established by Obamacare. It would also impose a premium penalty on people who do not maintain continuous health coverage.

The bill would cut federal funding for Medicaid, the insurance program for the poor, by $880 billion, or 25%, over 10 years. Medicaid will be converted from an open-ended entitlement to a per-capita system, wherein states are given a set amount for the number of people in categories including disabled, elderly, childless adults and pregnancy.  

Further, the new system gives states the power to request waivers for insurers that allow them to charge individuals higher premiums with pre-existing health conditions if they let coverage lapse. Critics claim that the state waiver process weakens coverage for those with pre-existing conditions. While Obamacare absolutely bars any insurer from denying coverage based on a pre-existing condition, the new law allows states to seek waivers that could allow insurance companies to set premiums based on one’s medical background.

Last but not the least, the bill favors wealthy Americans with massive tax cuts and scraps most of Obamacare’s taxes that are used to fund the law, including two taxes on high-income earners. It also rolls back Obamacare’s tax on health insurers, medical device manufacturers, drug manufacturers, and tanning bed salons.

Market Impact

The passage led to a surge in many healthcare stocks, particularly hospitals and insurance. While the repeal of the Affordable Care Act, or Obamacare, threatened margins of hospitals and insurers given the expected decline in health insurance coverage, stocks gained on a lower Obamacare tax burden which when combined with Trump’s corporate tax reform could result in handsome profits (read: 5 ETFs to Buy if Trump Tax Reform is Enacted by Year End).

Major names such as Humana HUM, Tenet Healthcare THC, UnitedHealth UNH, HCA Holdings HCA, and Aetna AET gained 2.2%, 1.8%, 0.9%, 0.8% and 0.8%, respectively, at the close on the day.

In the ETF world, most of the healthcare funds are in the green with VanEck Vectors Pharmaceutical ETF PPH benefiting the most on the day with a 1.2% gain. First Trust NYSE Arca Biotechnology Index Fund FBT, First Trust Nasdaq Pharmaceuticals ETF FTXH, SPDR S&P Pharmaceuticals ETF XPH and Loncar Cancer Immunotherapy ETF CNCR are up nearly 0.9%  (see: all the Healthcare ETFs here).

Are The Gains Real?

Most of the gains in the healthcare stocks seem real, except hospitals, which are expected to be hit hard by Medicaid cuts. As such, SPDR S&P Health Care Services ETF XHS, which tracks the performance of companies in healthcare services, healthcare facilities, managed healthcare and healthcare distributors, might be in trouble if the law is approved by Senate.
 
Additionally, the bill is expected to cut billions of dollars in health-care spending and result in millions of Americans going without health insurance, according to the Congressional Budget Office (read: Trumpcare Collapse Fuels Rally in Healthcare Stocks & ETFs).

However, the new legislation would be highly beneficial to health insurers as they will collect higher premiums. That said, iShares U.S. Healthcare Providers ETF IHF, which offers exposure to companies that provide health insurance, diagnostics and specialized treatment, would get a boost.

Medical devices stocks and iShares U.S. Medical Devices ETF IHI would also likely benefit under Trump administration as all the taxes imposed under Obamacare will no longer be levied. Further, pharma and biotech ETFs would continue to gain from the healthcare overhaul.

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