Investing in Healthcare

Investing in Healthcare

Healthcare Industry Overview

The healthcare industry provides us with preventative medicine, heals us when we are sick or injured, and helps us live longer and safer lives. That’s why it’s popular for investors to buy shares of healthcare industry companies, which can then generate gains, while investing in an industry that is keeping you healthy. After all, even the smallest medical advance has the potential to save your life or the life of someone you love and lead to substantial returns to the portfolios for those invested.

We all know that the US healthcare system is in need of constant investment and innovation, investing in this sector leads to that improvement over time. According to Simply Wall St, analysts predict healthcare industry growth will clock in at around 16.5% annually (1). That's an earnings growth rate that is right in line with being considered a higher revenue growth rate.

The healthcare sector in the stock market is enormous. The total US healthcare market size, or market capitalization, is equal to just over $6 trillion. This means there are plenty of opportunities in this growing sector of the market.

Opportunities to invest in companies like Moderna (MRNA) and Johnson & Johnson (JNJ) that developed COVID-19 vaccines; healthcare giants like Philips Healthcare that innovates on cloud technology for the industry; startups advancing CRISPR gene-editing technology; or remote diagnostic tools for seniors.

Even e-commerce companies like Amazon (AMZN) are moving into the prescription delivery space to make their impact on the healthcare sector. These examples and beyond create a mosaic of healthcare opportunities within reach for even the average “retail” investor.

The What, Who, and “How to Pay” of Healthcare

The “what” of healthcare encompasses the people, innovations, and systems around a person’s health, from prevention, diagnosis, treatment, recovery or cure of diseases to injuries and any other physical problems they might be experiencing.

The “who” of healthcare are the people who deliver the care and services with maintaining and improving that person’s health, from doctors and nurses to therapists and athletic trainers. In the US, “healthcare” also includes the entire healthcare delivery system, ranging from individual doctor’s offices all the way up to hospitals and pharmaceutical companies.

Of course, healthcare has to be paid for, and that’s where the health insurance side of things comes into the picture. In the US, health insurance today is a tangled web of private plans, employer-provided plans, government-backed programs like Medicare and Medicaid and more, with the Affordable Care Act, introduced in 2010, intended to expand affordable coverage to all Americans.

Healthcare’s History of Innovation and Disruption

Modern medical care has scaled up from the lone country doctor doing house calls to networks of providers and integrated groups of hospitals that work together to serve communities. Hospitals have a tradition of serving as a type of public service. This has its roots in the first hospital in the US, the Royal Hospital in New Orleans, which opened in 1722 as a military facility but later switched over for civilian use. By that point it was too expensive for most of New Orleans’s residents to visit, so a second, charity-based hospital was built nearby.

In the 20th century, medical innovation accelerated, with the advent of new technologies like X-ray and Magnetic Resonance Imaging improving doctors' diagnostic capabilities. The expansion of vaccines helped to protect public health from infectious diseases, and new surgical technologies like anesthetics, antibiotics and radiologic imaging helped save people from acute ailments.

In 2019, the healthcare industry faced its biggest challenge of the 21st century - the global COVID-19 pandemic. With challenges came innovations and stay-at-home orders and concerns over exposure at hospitals led to an explosion in the use of tele-health and digital health services, as well as the ubiquity of home diagnostics.

The stresses of the pandemic also threw healthcare inequities into sharp relief, revealing structural biases that impact people differently depending on where they fall along class lines, gender, and race. These inequities in the US healthcare system currently cost the country $320 billion (2). One can only imagine what that amount of money would do to reduce mortality rates of women of color in childbirth, for example. To address disparities, some companies have been developing low-barrier, equitable services from dental hygiene and diabetes care to vaccinations.

The Digital Future of Healthcare

From “hospitals without walls” and community-based care to patient-centric health practices, digital technologies are leading the way to the future of healthcare.

Healthcare providers, health systems, and health insurance companies are turning to cloud-based technologies, to the tune of $17.9 billion in 2022.

The growth in demand of home-care services will mean that three-quarters of US medical practices could be using remote patient monitoring (RPM) devices by 2024.

Artificial intelligence (AI) will help in managing patient care, blockchain in handling patient health records, chatbots for customer service, and even virtual reality for physician training.

Why Invest in Healthcare?

As an industry, healthcare is massive. The global healthcare market is predicted to reach more than $665 billion by 2028, but that is dwarfed by U.S. numbers. The US healthcare expenditure reached $4.3 trillion in 2021, equal to around $13,000 per person, and is projected to grow to $6.2 trillion by 2028.

Healthcare and social services is the largest industry in the US economy–fully 1 in 8 people in the US work in this sector—and the fastest growing sector, with 3.3 million jobs expected added by 2030 (5).

What’s the main engine driving this surge in the U.S.? The 70 million Baby Boomers looking to keep healthy and active, and preparing to “age in place” at home (6). Most will be using Medicare, with all four sectors of healthcare expanding to meet their varied needs—from drugs and medical procedures to in-home services and remote medical devices.

A Diverse Industry, Ripe for Investment

The four main sectors of healthcare each offer opportunities for investors, in the form of company stocks as well as mutual funds and exchange-traded funds that expose investors to the broader healthcare industry.

• Services and Facilities
• Medical Devices, Equipment, and Hospital Supply Manufacturers
• Medical Insurance, Medical Services, and Managed Care
• Pharmaceuticals

Another change that investors should note is the diversification within companies and health systems. Thanks to the stresses of COVID-19, high inflation, and Baby Boomers aging, many companies and systems have moved beyond core products or services to combine the sectors—like healthcare ecosystems.

Hospitals diversify by developing or acquiring primary care groups, ambulatory or pharmacy services, and health tech like tele-health services.

Several hospitals might diversify by joining together to deliver services to people within a neighborhood or a region, like one-stop-shops for all of their patient’s healthcare needs.

Companies have diversified their offerings. One of the key players in global healthcare is Thermo Fisher Scientific (TMO), a large-cap company that reaches across sectors. It supplies more than 400,000 customers—pharmaceutical, biotech, hospitals, diagnostic labs, research institutions and government agencies—with the tools and services they need to continue to advance medicine.

Healthcare investing search tip: You can invest in an exciting stock that may be higher risk than you’re comfortable with, but in a more diverse way.

A search on Magnifi for TMO will bring up the stock, but also a number of mutual funds and ETFs that include the TMO ticker.

The circular chart to the right of the name will show what percent of the fund is TMO. To find out whether TMO is the fund’s top holding, click the dropdown menu, and choose “Top Holdings.” This will show the other companies that the fund holds, and their percentages.

How to Invest in Healthcare

Healthcare is a huge industry with massive opportunities for investors to grow. Everything from drug development to medical devices, to home health services and much more are available to investors.

Start with a simple search for "healthcare" and add in additional search terms to narrow down your results. Take a look below at some common healthcare industry searches:

• Invest in Healthcare
• Healthcare and Pharmaceuticals
• Healthcare and Technology

References:

1. "U.S. Healthcare Sector Analysis," Updated June 22, 2023, Simply Wall St, https://simplywall.st/markets/us/healthcare
2. “US Healthcare Industry in 2023: Analysis of the health sector, healthcare trends, & future of digital health,” January 1, 2023, Insider Intelligence, https://www.insiderintelligence.com/insights/healthcare-industry/
3. “US Healthcare Industry in 2023: Analysis of the health sector, healthcare trends, & future of digital health,” January 1, 2023, Insider Intelligence, https://www.insiderintelligence.com/insights/healthcare-industry/
4. “US Healthcare Industry in 2023: Analysis of the health sector, healthcare trends, & future of digital health,” January 1, 2023, Insider Intelligence, https://www.insiderintelligence.com/insights/healthcare-industry/
5. “Employment Projections - 2021–2023,” news release, Bureau of Labor Statistics, U.S. Department of Labor, https://www.bls.gov/news.release/pdf/ecopro.pdf
6. “US Healthcare Industry in 2023: Analysis of the health sector, healthcare trends, & future of digital health,” January 1, 2023, Insider Intelligence, https://www.insiderintelligence.com/insights/healthcare-industry/

Disclosures:

Mutual Funds and Exchange Traded Funds (ETF’s) are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.

Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.