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Why This Could Be the Most Dangerous Time Ever to Invest in Healthcare Stocks

Keith Speights, The Motley Fool

This time it's different. 

Those are perhaps four of the most dangerous words for investors. The reality is that in nearly every case the present isn't all that different from the past. Investors who buy into the premise that "this time it's different" almost always pay a big price for doing so.

However, in one arena, this time truly could be different. Right now could be the most dangerous time ever for investing in healthcare stocks. And the danger level could increase significantly over the next couple of years. 

Bomb made of hundred dollarbills with a lit fuse

Image source: Getty Images.

A clear and present danger

There have been plenty of times in the past where uncertainty created high levels of risk for many healthcare stocks. For example, it was unknown at first how the Affordable Care Act, commonly known as Obamacare, might affect healthcare stocks. During the 2016 U.S. presidential election, Hillary Clinton's plans to lower drug costs terrified biotech investors. President Trump's comments and tweets about drugmakers has caused increased volatility for the stocks of drugmakers over the last two years as well.

But none of these past concerns presented an existential threat to much of the healthcare industry. Now, though, there's a clear and present danger that could wreak havoc on the stocks of publicly traded healthcare companies and many privately held healthcare companies, too.

Sen. Bernie Sanders (I-Vt.) introduced his Medicare for All bill to the U.S. Senate a few weeks ago. This legislation would establish the federal government as the single payer for all healthcare in the United States. Medicare for All would pay for practically every healthcare service, including hospital stays, physician visits, prescription drugs, mental health services, dental care, and home health.

Although there have been attempts through the years to pass single-payer healthcare legislation, there are several factors that make this effort unique. First, Sanders is one of the leading candidates seeking to be the Democratic nominee for president. He is currently running in second place behind former Vice President Joe Biden, according to RealClearPolitics' average of major polls. 

Other Democratic presidential candidates have also endorsed Sen. Sanders' Medicare for All bill. Sen. Corey Booker (D-N.J.), Sen. Kristen Gillibrand (D.-N.Y.), Sen. Kamala Harris (D-Calif.), and Sen. Elizabeth Warren (D-Mass.) are co-sponsors of the legislation. Harris currently ranks third in the RealClearPolitics polling average for the Democratic presidential nomination, while Warren and Booker are in fifth and seventh places, respectively.

They're not alone. South Bend, Indiana, Mayor Pete Buttigieg, who is currently in fourth place among the Democratic presidential candidates, also supports a version of Medicare for All. So do five others running for president. 

$1 bill torn in the center with the word "Medicare" showing through the hole

Image source: Getty Images.

An unprecedented impact

I'm not here to weigh the pros and cons of Medicare for All from a political or societal perspective. Instead, my goal is to highlight the investing risks the legislation presents. And make no mistake -- it would have an unprecedented impact on healthcare stocks.

The health insurance industry would virtually disappear under Sanders' plan. The Medicare for All bill prohibits health insurers from offering any health insurance coverage that duplicates the benefits included in the legislation. UnitedHealth Group (NYSE: UNH), for example, makes nearly all of its revenue from selling health insurance and providing pharmacy benefits management services that would no longer be allowed.

Drugmakers wouldn't be wiped out but would still be hit hard by Medicare for All. Raymond James healthcare policy analyst Chris Meekins estimates that drug prices would decrease by at least 30% under Medicare for All. It's not surprising that potential regulatory upheaval, especially the prospect for a single-payer system, ranks as the No. 1 risk for Pfizer (NYSE: PFE) right now. The big pharma company made nearly half of its revenue in the U.S. last year.

Hospitals remain the largest player in the U.S. healthcare industry. You might think hospitals could benefit from Medicare for All, as many did with the enactment of Obamacare. However, the current Medicare system pays hospitals less than their actual costs, according to a study published online recently by the Journal of the American Medical Association. This analysis projected that Medicare for All would mean "a loss of $151 billion nationally incurred by 5,262 U.S. community hospitals." Many hospitals with low profit margins today could begin losing money each year -- a prospect that's unsustainable over the long run.

Hospital entrance signs

Image source: Getty Images.

This scenario would almost certainly have a ripple impact as well. Hospitals would have less money to spend on new technology. Even longtime healthcare stalwart Johnson & Johnson (NYSE: JNJ) could feel the pain. J&J, like Pfizer, would be negatively affected by lower drug prices. But the company's medical-device segment, which sells primarily to hospitals, generates roughly one-third of J&J's total revenue. 

Significant disruption for healthcare stocks would also probably weigh on the broader stock market. Twenty of the top 100 stocks by market cap in the S&P 500 index operate in the healthcare industry, including United HealthGroup, Pfizer, and Johnson & Johnson. If the prices of these stocks fall dramatically -- as they almost surely would if Medicare for All became law -- it would pull the broader market indexes down as well.

What to do -- and not do

Some investors might be tempted to dismiss the threat from Medicare for All. Several Wall Street analysts have minimized the danger. Jefferies analyst Jared Holz, for example, wrote to clients that Sanders' bill is "more sound bite than threatening."

But most of the presidential candidates of a major political party support Medicare for All. There is a significant chance that one of these candidates could defeat Donald Trump to become the next U.S. president and potentially gain enough votes in Congress to pass the legislation. That scenario isn't one for investors to ignore. 

On the other hand, investors shouldn't panic. There's a long way to go before the 2020 presidential election. The current Democratic front-runner, Biden, hasn't expressed support for Medicare for All and could be more likely to propose a centrist healthcare reform program. It's also possible that Trump could be re-elected. And even if the next president attempts to pass Medicare for All, doing so could be a difficult challenge.

Rather than be a Pollyanna or a panicker, investors should instead be pragmatic. Don't put too much of your investment portfolio in healthcare stocks. However, remember that times of perceived risk also often present great buying opportunities. 

Probably the best healthcare stocks to consider are those that offer solutions that help reduce overall healthcare costs. For example, Teladoc Health (NYSE: TDOC) provides telehealth services that are typically lower than in-office physician visits. The company's virtual care services would probably enjoy solid demand even if the U.S. moved to a single-payer healthcare system.  

Buying a diversified group of stocks of well-run companies with strong economic moats and holding them for the long term is the formula for investing success. This time might well be different with respect to the threat to the healthcare industry. But some things never change.

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Keith Speights owns shares of Pfizer and Teladoc Health. The Motley Fool owns shares of and recommends Teladoc Health. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.