Taking Stock of the Affordable Care Act

The Affordable Care Act’s health insurance exchanges are now online. Source: Andrew Burton/Getty Images.

As parts of the government shut down October 1, a new section opened: the Affordable Care Act’s (ACA) health insurance exchanges. A week has passed, and website glitches and questions about how many participants there actually are have dominated the headlines. What didn’t happen: markets going haywire as the exchanges opened.

Whether you think the ACA will bring economic boom, bust or just bluster, markets have dealt with the issue—with headlines pouring over provisions for years, there likely isn’t anything left to surprise investors.Some form of national health care reform has been a virtual certainty since 2008’s presidential campaign—both candidates (Senator John McCain and now-President Obama) had a plan. Five-plus years of national conversation on sweeping change in the sector followed.

When legislation looks likely, markets don’t delay. Consider 2002’s Sarbanes-Oxley, which carried significant macroeconomic and market impact. The bill moved fast—the final version entered the house in April and was law three months later, and the S&P fell roughly 30% in the interim.

Contrast this with the ACA. Headlines have discussed the idea since 2008. Congress debated it extensively throughout 2009, weighing many iterations of the legislation—and removing several teeth in the process. The bill passed Sunday, March 21, 2010, and many fretted market impact the next day. Yet the S&P 500 rose—the uncertainty accompanying legislative deliberations was gone. Markets knew what they’d be dealing with.

And then they started dealing with it. In the law’s immediate wake, Health Care underperformed the S&P 500—and lagged through early 2011. Which you’d largely expect for a law that radically alters the foundation of a specific industry—however you might feel about the changes in question, markets typically just don’t like change. Change means uncertainty. And for some segments of the Health Care sector—particularly managed care facilities—ACA meant significant business model changes. Markets weighed this for a while. Health Care stocks didn’t do poorly—after a choppy 2010 summer (not dissimilar to the entire market) they rose irregularly—they just didn’t do as well as the rest of the market.

In mid-2011, Health Care stopped lagging. Amid the early 2012 Supreme Court arguments and in the run-up to the Court’s June 28, 2012 decision affirming most of the ACA’s constitutionality, stocks and Health Care stocks marched higher, often in lockstep. Then came the 2012 Presidential election, widely interpreted as a referendum on the ACA—and Obama’s victory as the law’s final affirmation. Stocks fell a bit in the two weeks following the election, then resumed their upward march—with Health Care outperforming. Year to date, the sector’s returns are near-double the index. And on July 2, 2013, when the Obama administration announced a year-long delay of the hotly contested employer mandate, markets largely yawned—not quite what you’d expect if they perceived the change as wildly good or bad. (See Exhibit 1)

Exhibit 1: S&P 500 and S&P 500 Health Care Sector Total Return

Source: FACTSET Data Systems, Inc. Date range is 03/21/2010 – 10/09/2013.

Looking ahead, how should investors think about ACA? As they would with any piece of legislation that creates winners and losers within a given industry—a potential source of opportunity. Healthcare cuts across many different fields, from pharmaceuticals to medical equipment, and particular niches in the industry may benefit or be hurt by the new legislation. Managed care providers might feel a pinch. But Pharmaceuticals could very well benefit from higher demand for prescription drugs, which should offset the small new taxes. Ditto for firms developing and selling medical devices. Changed landscapes in a given industry are almost always gameable.

Other than that, however, legislation primarily targeting one industry in one country shouldn’t hold much sway over a well-constructed, diversified, global portfolio—especially this late in the game, there are simply too many variables competing for stocks’ attention.