Opportunities Abound In Healthcare

U.S. healthcare spending amounted to $3 trillion in 2014, up 5.3% from 2013, according to the Center for Medicare Services.

Looking ahead, aging Baby Boomers and technological advances should ensure that healthcare spending will grow faster than the economy for at least the next decade.

Thus, income investors should have some holdings in this important sector, if only as a hedge against their old-age medical expenses.

Of the healthcare sector’s 2014 spending, $972 billion went to hospitals, $604 billion to physicians and clinical services, $298 billion to prescription drugs, $156 billion to nursing care facilities, $114 billion to dental services, and $856 billion to other areas of healthcare.

In other words, there are a wide range of areas in which to invest.

Ethical Speed Bumps

There’s one problem with the healthcare sector, though: It’s full of scams. The sector depends on government for a large portion of revenues and on dodgy negotiations with insurance companies for much of the rest.

In addition, much of the sector’s revenues depend on intellectual property rights that are thoroughly gameable by lawyers. Thus, the ethics of the sector may make you want to wash your hands after dealing with it.

Valeant Pharmaceuticals International Inc. (VRX), for example, has a major business strategy that involves buying old drugs (on which sick people depend) and then raising their prices by 1,000%.

And Martin Shkreli, once active in pharmaceutical sector mergers and acquisitions, was recently arrested for securities fraud. Undoubtedly, we don’t want to do business with such people.

Choosing Wisely

The healthcare sector has also suffered from very high valuations for a number of years, so dividend yields from established companies can be a bit skimpy. Ultimately, the combination of ethics problems and high valuations means you need to look at decent dividend yields with a very cold eye, indeed.