Two More Ways to Protect Your No. 1 Asset

Editor's note: Today, we're finishing up the series from our colleague Thomas Carroll. This piece, adapted from the Health & Wealth Bulletin in 2020, covers two more tips you need to navigate this critical time for health care in America... not just as a consumer, but as an investor...

Despite attending graduate school at the Johns Hopkins Bloomberg School of Public Health, I'm not a clinician.

That said, my entire career has been devoted to studying the health care system, educating investors, and investing my own capital into innovative startups.

In my experience, most people have little to no knowledge of what to do when they are thrust into the health care system... be it elective, involuntary due to an accident or injury, or a disease like a cancer diagnosis.

Yesterday, I shared three tips on how to understand U.S. health care, based on my 2020 presentation. Let's cover the last two today...

1. Don't be spooked by health care reform.

More and more, health care is becoming a major deciding factor in elections...

The COVID-19 pandemic has crystallized its importance.

While the U.S. health system needs reform, there is nothing on the horizon that suggests major changes. That is good for investors, as uncertainty about the government changing the rules is not good for health care stocks. There will, however, be some tweaks.

What do I expect? Overall, the most likely scenario will march the U.S. toward a deeper version of the Affordable Care Act ("ACA").

We'll likely see ideas added to the ACA structure focused on strengthening the health care backbone against future pandemics. (Mark my words – what we're seeing with COVID-19 will happen again.)

I know what you're thinking...

Despite being one of the most politicized and polarizing laws ever passed, it's actually a good baseline to start from. Over time, it will be strengthened... Its original problems will be solved.

If supported, the ACA might be a major step toward universal health care delivered by private-sector entrepreneurs.

You might not like the sound of that... But don't worry or get worked up over it. Life is too short.

Instead, keep in mind that reform efforts will take years. They usually lead to a better system over time. And ultimately, everyone will benefit, especially society as a whole.

2. Don't hate your HMO – invest in it!

From 1966 to 2016, health insurance premiums rose 10.7% annually, on average. This is more than the S&P 500 Index returned over this time period (9.7%). Wouldn't it be great to somehow invest in this?

We can.

You see, health insurance companies are the middlemen that reflect these cost increases. They are the companies and government agencies that pay the hospitals, doctors, pharmacies, and other providers of care.

These companies consolidate all health care spending into a single price paid for all services. Their revenue must grow by the same rate as underlying costs. Otherwise, they will go out of business.

If health care costs are expected to rise 9% in the coming year, a large health insurer will set its premiums to rise by at least that same amount. Said differently, these companies have a built-in price inflator that has averaged over 10% for 50 years.

For you small business owners, wouldn't it be great to raise your prices every year by this amount?

As a health care analyst, this idea was the central focus of my investment thesis for health insurance companies. It has held up for more than 20 years since these companies evolved into the modern-day players they are today.

These stocks have been some of the best-performing investments in health care.

We are currently in what I call the "Platinum Age of Health Care." The pandemic launched new health care tech, therapies, and interventions. It also accelerated existing technologies that already existed – like telemedicine. The private sector will put these new approaches in place in coming years.

If we're all better educated, we can influence how this very important system is shaped. If not, the government will reshape it for us. And that will not be the best possible outcome. So take the time to learn as much as you can so you can protect your most valuable asset – your health.

It will save you frustration. It may save you a lot of money. It will support your investment goals.

It may also save your life.

Happy living and investing,

Thomas Carroll

Editor's note: This is an undeniable tailwind for investors. Health care makes up nearly 20% of the U.S. economy. And at $4.1 trillion, it's not just bigger than every penny spent nationwide on food, cars, or energy... It's nearly the size of all three put together.

Now, health care is entering a new age. COVID-19 has kicked innovation into high gear. And even the smallest changes we're about to see could be worth billions... in a sector that's already an incredible hedge against both inflation and recession.

Our colleague Dr. David Eifrig recently shared how to harness this growth potential, while protecting your wealth in what might be the most ironclad sector in the world... Learn more here, while his discussion is still online.

Further Reading

"Pharma companies have transitioned where and how they invest," Joel Litman writes. So even though health care stocks have been struggling amid greater regulatory and inflationary pressure, they could help us earn huge returns in the long term... Learn more here: Why the Sell-Off in Big Pharma Stocks Won't Last.

"One of the most important lessons of biotech investing has nothing to do with drugs," David Lashmet says. Novice biotech investors only focus on finding new blockbuster medications. But that's not the only way to profit in this sector... Get the full story here.