Health care companies consider President Barack Obama's budget a potential profit-killer. Investors agreed and dumped their shares last week, dragging down exchange traded funds. The budget aims to raise taxes and deduction limits for people who earn more than $250,000 a year. The ultimate goal is to raise $634 billion to help fix the health care system. The tax hikes will generate $318 billion of that amount, and the rest will be squeezed from Medicare, the government-sponsored health program for seniors. The actual cost to create a universal health system is projected to be significantly higher than the budget estimates. To close the gap, the government might cut reimbursements paid to health-care providers, eroding profitability. The Medicare Advantage plans offered by private insurers could lose as much as $175 billion. The Advantage program is on the chopping block because it pays 14% more to providers than Medicare would for the same services. The health-care and biotechnology ETFs we track lost 7.4% during the five trading days that ended Feb. 26. The worst performer of the group, the iShares Dow Jones U.S. Healthcare Providers Index Fund ( IHF), sank 16% after HealthSpring ( HS), Humana ( HUM), WellCare Health Plans ( WCG), Psychiatric Solutions ( PSYS) and UnitedHealth Group ( UNH) each lost at least a third of their values. Obama promises that workers who like their company plans will be able to keep them. But if the government offers better benefits with lower premiums, private health groups might be forced to compete. If people move en masse to government plans, private insurers would suffer.
The nightmare scenario for health insurers, a "Medicare for All" system like the one Representative Dennis Kucinich envisioned in his 2005 bill, could put many of these companies out of business. On the other hand, the U.S. automobile industry and other sectors consider the end of company-sponsored health care the route to international competitiveness.
The C-rated ProShares UltraShort Health Care Fund ( RXD), which bets on falling stocks, advanced 17%. Two Rydex ETFs lacked trading activity on Feb. 19, so comparable return data isn't available. But based on the funds' net asset values, the Rydex Inverse 2X S&P Select Sector Health Care ETF ( RHO) gained 18%, while the bullish equivalent, Rydex 2X S&P Select Sector Health Care ETF ( RHM) lost 17%. These 200% leveraged funds would have been the best- and worst-performing health-care funds last week. Until the uncertainty surrounding the health-care system is resolved, the outlook for health and biotechnology shares and the funds that hold them remains murky. For more information, check out an explanation of our ratings.