Since President Obama signed the Affordable Care Act into law on March 23, 2010, the Morgan Stanley Health Care Payer Index–an equal dollar-weighted benchmark tracking 12 health maintenance organizations (HMO) and pharmaceutical benefit managers–has generated a total return of 121 percent. In comparison, the S&P 500 gained 60 percent and the S&P 500 Health Care Index returned 74 percent over the same period.
The outperformance of the Morgan Stanley Health Care Payers Index likely surprises some readers; the enactment of the Affordable Care Act is widely expected to pose modest challenges for HMOs, depending on their business mix and customer base.
However, the market had already started to price in the growing risk of health care reform long before President Obama was elected. In the three years leading up to the Affordable Care Act’s passage, the Morgan Stanley Health Care Payers Index underperformed the S&P 500 and the S&P 500 Health Care Index.
In short, once health care reform became the law of the land in 2010, HMOs’ valuations largely reflected the worst-case scenario.
As the market came to grips with the terms of the Affordable Care Act and their implementation, shares of HMOs have outperformed because the law proved to be less damaging to the group than initially anticipated.
The Morgan Stanley Health Payers Index has fetched a forward-price-to-earnings multiple below its historical average since the 2007-09 financial crisis.
However, the index in June 2013 rallied to more than 15 times forward earnings, reflecting declining risks and less uncertainty as the market comes to understand how the Affordable Care Act will be implemented and the law’s potential ramifications. We see the potential for additional multiple expansion for our favorite name in the space