The Bull and Bear Case to Hold Healthcare

CURE represents 3x leveraged healthcare, which is what I plan on using, but if you do not use leverage the information applies the same to the unleveraged healthcare ETF IYH. CURE Bull Case The current median age of the US population has been consistently increasing for at least the past 30 years [1]. The median life expectancy has also generally been increasing during this same time [2]. Life expectancy has been increasing at a lesser rate than the median age, indicating that the average person is getting older due to changes in the population growth rate rather than an increase in life expectancy. To build on this, life expectancy has remained flat for the past five years while the median age has continued to increase [2]. This indicates that life expectancy may be plateauing and that the gap between life expectancy and median age will continue to narrow. This is relevant to CURE because spending on healthcare increases aggressively as people age [3]. People who are 65+ spend 3.8 times as much, on average, as people who are between 18 and 44. Given the trend described above, we can expect the proportion of people who are 65+ to increase in the next decade, which means the per capita amount spent on healthcare is also expected to increase. The claim that spending will increase is supported by historical trends. In the same 30 year time span used above, the amount spent per person on healthcare costs has more than doubled [4]. It can be drawn from this that technological advancements in the healthcare sector, with respect to lowering costs, are either non-existent, negligible compared to other cost factors, or being converted into larger profit margins. Age is only one factor in the growing cost of healthcare. A second major factor is the rate at which obesity has been increasing [21]. The average obese person will spend $1,900 more per year which is a 16% increase above the average [4][22]. It is generally estimated that the rate of obesity will continue to increase through at least 2030 [23]. This builds on the idea that the revenue streams for the healthcare sector are either growing or stable due to its inelasticity.  Since early 2020 covid-19 has had a significant impact on healthcare systems everywhere. The virus has had several significant mutations which continue to overtake the previous versions of itself [5]. With each new mutation the efficacy of the various vaccines is called into question. Some of the more recent variants appear to be less impacted by the vaccines than older variants [6]. This has increased the likelihood that covid-19 becomes endemic and starts to enter into a regular cycle like influenza [7]. This is expected to be the most likely outcome at this point in the pandemic [8].   This is relevant to CURE primarily because the three main US vaccine creators Johnson & Johnson, Pfizer, and Moderna make up over 15% of the weight of the ETF [9]. With the virus expected to become endemic, vaccines will likely be needed on a regular basis as new mutations appear. There are also over three billion people throughout the world who have not yet received a first dose [10]. These two areas give all three of these businesses, along with others, a large and stable cashflow provided by the government. Aside from the direct creation of vaccines other businesses such as Merck and CVS, which make up another 6% of the ETF, will also benefit [9]. Merck has received FDA approval for an antiviral pill that can be used to help treat covid-19 at home and CVS sells covid-19 at home testing kits [11][12].   The healthcare sector was chosen as a focus for two primary reasons. The first is that in a rising rate environment the economy can become sluggish [13]. Spending slows as people start to cut back on discretionary goods and services. As borrowing costs increase the investments made by businesses start to become less cost effective. However, despite these conditions, spending on healthcare maintains its historical trend upward [4]. The second reason it was chosen was due to the likelihood of covid-19 becoming endemic. This would create an additional stable cashflow for a significant portion of the companies within this ETF. These two factors are well known and expected which implies any growth from them is priced into their value. Despite this, the sector should provide stability going forward into an uncertain environment.  Bear Case Single payer healthcare is when the government covers essentially all healthcare costs for its citizens. This is currently implemented fully in 17 countries, most of which are highly developed [14]. If this policy were to be adopted by the US, it would represent one of the worst case scenarios for CURE. Single payer is expected to reduce the total cost of healthcare by an average of about 200 billion dollars per year [15][16]. One of the most impactful areas of savings comes in the form of drug price reductions that have a projected upper bound of 27% [17]. Due to the government paying for all costs they would get the final say in how large profit margins could be. There’s little incentive to pay more than the minimum required to sustain the service.  This is relevant to CURE because a reduction in healthcare spending directly impacts almost every company in the ETF. The insurance companies would lose huge amounts of their business, the pharmaceutical companies would have their profits severely capped, and over the counter sales would likely decrease if the cost of prescriptions fell significantly. These would all be side effects of a single payer system, but that does not mean they can only happen if a single payer system is implemented. It is possible that any area of the healthcare industry gets independently regulated. The most likely candidate for this is the pharmaceutical industry. There are already bills such as the Lower Drug Costs Now Act waiting for the political capital to become law [18]. Despite 63% of Americans supporting some form of government sponsored healthcare, it is unlikely to become a reality until 2024 at the earliest [19]. The current congress is highly divided and is only able to pass bills that all 50 Democratic senators agree to the terms of, as a general trend. The election in the fall of 2022 is expected to be close which is unlikely to give Democrats the edge they would need to pass legislation like this, but the possibility of a sweeping victory always remains. The next presidential election in 2024 is too far away to make predictions with any accuracy. One of the largest factors benefiting the healthcare industry recently is covid-19. The virus is expected to become endemic, but that isn’t the only possibility [7]. There are two alternatives that would severely impact the expected earnings of a significant portion of the ETF. The first is if an almost entirely harmless mutation forms and becomes dominant. Most viruses are not harmful and if covid becomes one of them it could remove the need for a vaccine and a huge amount of priced in growth would be lost [20]. The second is if a vaccine is invented that is able to treat the virus with a much higher and longer lasting efficacy. This would still require vaccines be created but could remove the need for regular shots. This would have a lesser impact than a harmless variant but would still hurt expected returns.  An area of weakness in the industry is the inability to retain skilled and experienced employees. During the covid-19 pandemic 20% of healthcare workers quit their jobs [24]. This is not unique to the healthcare industry though. During 2019 22% of people quit their jobs throughout the year and this increased to 25% in 2021 [25]. What is unique to the healthcare industry is the high rate of job growth in the field. Between 2020 and 2030 the number of jobs in the field is expected to grow at 16% which is significantly higher than the national average [26]. This is a strong sign for the industry but could easily become a weakness if the supply of healthcare jobs is not able to keep up. Shortages lead to higher costs, lower growth, and smaller earnings.    The healthcare sector does not have many significant and consistent drags that may cause it to underperform outside of the worker shortage which is currently hurting most industries. The main risks associated with it are going to come in the form of sudden medical developments or new governmental regulations on some area of business. These will be heavily influenced by the political climate which is constantly changing and difficult to predict. While these medical and political factors are difficult to predict, the factors driving the value of the ETF like covid-19 and old age are expected. This implies that the growth and stability from these factors is already priced into the stocks which signals growth will be limited in the near future. If you like what I write come check out my subreddit: r/financialanalysis.  Sources [1.](https://www.ibisworld.com/us/bed/median-age-of-population/334/) [2.](https://datacommons.org/place/country/USA?utm_medium=explore&mprop=lifeExpectancy&popt=Person&hl=en) [3.](https://www.registerednursing.org/articles/healthcare-costs-by-age/) [4.](https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/) [5.](https://coronavirus.health.ny.gov/covid-19-variant-data) [6.](https://www.mayoclinic.org/diseases-conditions/coronavirus/in-depth/coronavirus-vaccine/art-20484859#covid-variants) [7.](https://www.cdc.gov/flu/about/season/flu-season.htm#:~:text=In%20the%20United%20States%2C%20flu%20season%20occurs%20in%20the%20fall,last%20as%20late%20as%20May.) [8.](https://www.nature.com/articles/d41586-021-00396-2) [9.](https://www.marketwatch.com/investing/fund/iyh/holdings) [10.](https://www.nytimes.com/interactive/2021/world/covid-vaccinations-tracker.html) [11.](https://www.npr.org/2021/12/23/1067221952/covid-19-pill-fda-merck) [12.](https://www.cvs.com/shop/home-health-care/home-tests) [13.](https://www.livemint.com/Opinion/F5Q7iaPFrR6X05dJOhWYjI/Do-higher-interest-rates-lead-to-lower-growth.html) [14.](https://worldpopulationreview.com/country-rankings/countries-with-single-payer) [15.](https://thehill.com/blogs/congress-blog/healthcare/484301-22-studies-agree-medicare-for-all-saves-money) [16.](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6961869/) [17.](https://www.ucsf.edu/news/2020/01/416416/single-payer-systems-likely-save-money-us-analysis-finds) [18.](https://www.speaker.gov/LowerDrugCosts) [19.](https://www.pewresearch.org/fact-tank/2020/09/29/increasing-share-of-americans-favor-a-single-government-program-to-provide-health-care-coverage/) [20.](https://phys.org/news/2020-04-defense-viruses-harmless-beneficial.html) [21.](https://www.advisory.com/en/daily-briefing/2020/12/17/obesity) [22.](https://www.usnews.com/news/health-news/articles/2021-03-24/obesity-costs-the-average-us-adult-almost-1-900-per-year-study#:~:text=Overall%2C%20health%20care%20costs%20for,care%20expenses%2C%20the%20researchers%20found.) [23.](https://www.nejm.org/doi/full/10.1056/NEJMsa1909301) [24.](https://www.usnews.com/news/health-news/articles/2021-11-15/us-faces-crisis-of-burned-out-health-care-workers) [25.](https://www.cnbc.com/2021/10/14/1-in-4-workers-quit-their-job-this-year-according-to-new-report.html) [26.](https://www.bls.gov/ooh/healthcare/home.htm)

back

The Bull and Bear Case to Hold Healthcare

bullish

CURE represents 3x leveraged healthcare, which is what I plan on using, but if you do not use leverage the information applies the same to the unleveraged healthcare ETF IYH.

CURE

Bull Case


The current median age of the US population has been consistently increasing for at least the past 30 years [1]. The median life expectancy has also generally been increasing during this same time [2]. Life expectancy has been increasing at a lesser rate than the median age, indicating that the average person is getting older due to changes in the population growth rate rather than an increase in life expectancy. To build on this, life expectancy has remained flat for the past five years while the median age has continued to increase [2]. This indicates that life expectancy may be plateauing and that the gap between life expectancy and median age will continue to narrow.

This is relevant to CURE because spending on healthcare increases aggressively as people age [3]. People who are 65+ spend 3.8 times as much, on average, as people who are between 18 and 44. Given the trend described above, we can expect the proportion of people who are 65+ to increase in the next decade, which means the per capita amount spent on healthcare is also expected to increase. The claim that spending will increase is supported by historical trends. In the same 30 year time span used above, the amount spent per person on healthcare costs has more than doubled [4]. It can be drawn from this that technological advancements in the healthcare sector, with respect to lowering costs, are either non-existent, negligible compared to other cost factors, or being converted into larger profit margins.

Age is only one factor in the growing cost of healthcare. A second major factor is the rate at which obesity has been increasing [21]. The average obese person will spend $1,900 more per year which is a 16% increase above the average [4][22]. It is generally estimated that the rate of obesity will continue to increase through at least 2030 [23]. This builds on the idea that the revenue streams for the healthcare sector are either growing or stable due to its inelasticity.

Since early 2020 covid-19 has had a significant impact on healthcare systems everywhere. The virus has had several significant mutations which continue to overtake the previous versions of itself [5]. With each new mutation the efficacy of the various vaccines is called into question. Some of the more recent variants appear to be less impacted by the vaccines than older variants [6]. This has increased the likelihood that covid-19 becomes endemic and starts to enter into a regular cycle like influenza [7]. This is expected to be the most likely outcome at this point in the pandemic [8].

This is relevant to CURE primarily because the three main US vaccine creators Johnson & Johnson, Pfizer, and Moderna make up over 15% of the weight of the ETF [9]. With the virus expected to become endemic, vaccines will likely be needed on a regular basis as new mutations appear. There are also over three billion people throughout the world who have not yet received a first dose [10]. These two areas give all three of these businesses, along with others, a large and stable cashflow provided by the government. Aside from the direct creation of vaccines other businesses such as Merck and CVS, which make up another 6% of the ETF, will also benefit [9]. Merck has received FDA approval for an antiviral pill that can be used to help treat covid-19 at home and CVS sells covid-19 at home testing kits [11][12].

The healthcare sector was chosen as a focus for two primary reasons. The first is that in a rising rate environment the economy can become sluggish [13]. Spending slows as people start to cut back on discretionary goods and services. As borrowing costs increase the investments made by businesses start to become less cost effective. However, despite these conditions, spending on healthcare maintains its historical trend upward [4]. The second reason it was chosen was due to the likelihood of covid-19 becoming endemic. This would create an additional stable cashflow for a significant portion of the companies within this ETF. These two factors are well known and expected which implies any growth from them is priced into their value. Despite this, the sector should provide stability going forward into an uncertain environment.

Bear Case


Single payer healthcare is when the government covers essentially all healthcare costs for its citizens. This is currently implemented fully in 17 countries, most of which are highly developed [14]. If this policy were to be adopted by the US, it would represent one of the worst case scenarios for CURE. Single payer is expected to reduce the total cost of healthcare by an average of about 200 billion dollars per year [15][16]. One of the most impactful areas of savings comes in the form of drug price reductions that have a projected upper bound of 27% [17]. Due to the government paying for all costs they would get the final say in how large profit margins could be. There's little incentive to pay more than the minimum required to sustain the service.

This is relevant to CURE because a reduction in healthcare spending directly impacts almost every company in the ETF. The insurance companies would lose huge amounts of their business, the pharmaceutical companies would have their profits severely capped, and over the counter sales would likely decrease if the cost of prescriptions fell significantly. These would all be side effects of a single payer system, but that does not mean they can only happen if a single payer system is implemented. It is possible that any area of the healthcare industry gets independently regulated. The most likely candidate for this is the pharmaceutical industry. There are already bills such as the Lower Drug Costs Now Act waiting for the political capital to become law [18].

Despite 63% of Americans supporting some form of government sponsored healthcare, it is unlikely to become a reality until 2024 at the earliest [19]. The current congress is highly divided and is only able to pass bills that all 50 Democratic senators agree to the terms of, as a general trend. The election in the fall of 2022 is expected to be close which is unlikely to give Democrats the edge they would need to pass legislation like this, but the possibility of a sweeping victory always remains. The next presidential election in 2024 is too far away to make predictions with any accuracy.

One of the largest factors benefiting the healthcare industry recently is covid-19. The virus is expected to become endemic, but that isn't the only possibility [7]. There are two alternatives that would severely impact the expected earnings of a significant portion of the ETF. The first is if an almost entirely harmless mutation forms and becomes dominant. Most viruses are not harmful and if covid becomes one of them it could remove the need for a vaccine and a huge amount of priced in growth would be lost [20]. The second is if a vaccine is invented that is able to treat the virus with a much higher and longer lasting efficacy. This would still require vaccines be created but could remove the need for regular shots. This would have a lesser impact than a harmless variant but would still hurt expected returns.

An area of weakness in the industry is the inability to retain skilled and experienced employees. During the covid-19 pandemic 20% of healthcare workers quit their jobs [24]. This is not unique to the healthcare industry though. During 2019 22% of people quit their jobs throughout the year and this increased to 25% in 2021 [25]. What is unique to the healthcare industry is the high rate of job growth in the field. Between 2020 and 2030 the number of jobs in the field is expected to grow at 16% which is significantly higher than the national average [26]. This is a strong sign for the industry but could easily become a weakness if the supply of healthcare jobs is not able to keep up. Shortages lead to higher costs, lower growth, and smaller earnings.

The healthcare sector does not have many significant and consistent drags that may cause it to underperform outside of the worker shortage which is currently hurting most industries. The main risks associated with it are going to come in the form of sudden medical developments or new governmental regulations on some area of business. These will be heavily influenced by the political climate which is constantly changing and difficult to predict. While these medical and political factors are difficult to predict, the factors driving the value of the ETF like covid-19 and old age are expected. This implies that the growth and stability from these factors is already priced into the stocks which signals growth will be limited in the near future. If you like what I write come check out my subreddit: r/financialanalysis.

Sources
[1.](https://www.ibisworld.com/us/bed/median-age-of-population/334/)
[2.](https://datacommons.org/place/country/USA?utm_medium=explore&mprop=lifeExpectancy&popt=Person&hl=en)
[3.](https://www.registerednursing.org/articles/healthcare-costs-by-age/)
[4.](https://www.healthsystemtracker.org/chart-collection/u-s-spending-healthcare-changed-time/)
[5.](https://coronavirus.health.ny.gov/covid-19-variant-data)
[6.](https://www.mayoclinic.org/diseases-conditions/coronavirus/in-depth/coronavirus-vaccine/art-20484859#covid-variants)
[7.](https://www.cdc.gov/flu/about/season/flu-season.htm#:~:text=In%20the%20United%20States%2C%20flu%20season%20occurs%20in%20the%20fall,last%20as%20late%20as%20May.)
[8.](https://www.nature.com/articles/d41586-021-00396-2)
[9.](https://www.marketwatch.com/investing/fund/iyh/holdings)
[10.](https://www.nytimes.com/interactive/2021/world/covid-vaccinations-tracker.html)
[11.](https://www.npr.org/2021/12/23/1067221952/covid-19-pill-fda-merck)
[12.](https://www.cvs.com/shop/home-health-care/home-tests)
[13.](https://www.livemint.com/Opinion/F5Q7iaPFrR6X05dJOhWYjI/Do-higher-interest-rates-lead-to-lower-growth.html)
[14.](https://worldpopulationreview.com/country-rankings/countries-with-single-payer)
[15.](https://thehill.com/blogs/congress-blog/healthcare/484301-22-studies-agree-medicare-for-all-saves-money)
[16.](https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6961869/)
[17.](https://www.ucsf.edu/news/2020/01/416416/single-payer-systems-likely-save-money-us-analysis-finds)
[18.](https://www.speaker.gov/LowerDrugCosts)
[19.](https://www.pewresearch.org/fact-tank/2020/09/29/increasing-share-of-americans-favor-a-single-government-program-to-provide-health-care-coverage/)
[20.](https://phys.org/news/2020-04-defense-viruses-harmless-beneficial.html)
[21.](https://www.advisory.com/en/daily-briefing/2020/12/17/obesity)
[22.](https://www.usnews.com/news/health-news/articles/2021-03-24/obesity-costs-the-average-us-adult-almost-1-900-per-year-study#:~:text=Overall%2C%20health%20care%20costs%20for,care%20expenses%2C%20the%20researchers%20found.)
[23.](https://www.nejm.org/doi/full/10.1056/NEJMsa1909301)
[24.](https://www.usnews.com/news/health-news/articles/2021-11-15/us-faces-crisis-of-burned-out-health-care-workers)
[25.](https://www.cnbc.com/2021/10/14/1-in-4-workers-quit-their-job-this-year-according-to-new-report.html)
[26.](https://www.bls.gov/ooh/healthcare/home.htm)

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Confidence
1-3 Years
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