Morningstar Advisor - Spring 2008 - 75

bad economic times. For example, out-ofpocket expenditures as a percentage of total health-care spending have declined steadily since 1965, when Medicare and Medicaid were signed into law. Government and private health insurers have been picking up more of the tab. Consequently, health-care spending is less dependent on the consumer, and the sector is less exposed to consumer cycles as a result. SM: How long can that continue? With rising AM: That’s a definite risk. So far, the system has relied on the deep pockets of the government and private insurers, but those pockets aren’t infinitely deep. Also, a number of factors could cause outof-pocket expenditures to increase. For example, employers have reduced coverage and pushed more health-care costs onto employees. Furthermore, the percentage of uninsured individuals has been rising, particularly among the middle class. Plus, if unemployment rises, out-of-work individuals could contribute to the increase in the uninsured. These consumers are often forced to pick up health-care costs on their own, and they may be more likely to cut back on health-care spending during lean times. One of the contributing factors to the sector’s past resilience is the decline in out-ofpocket expenditures. If that trend reverses, the sector could become more vulnerable to economic forces. SM: If health-care spending has outstripped economic growth for the past several decades, does that mean health care has in turn grown considerably over time? AM: That’s right. In real terms, spending costs, it seems like both government and private insurers won’t always be able to pick up the tab. Selected Health-Care ETFs Fund Name Inception Expense Ratio (%) YTD Return (%) Worst 3-Mo Return (%) % in Top 10 Holdings Avg Mkt Cap ($mil) Health Care Sel SPDR XLV iShares DJ Health IYH iShares SP Glb Hlth IXJ PowerShares Dyn Health PTH PowerShares FTSE Hth Care PRFH Vanguard HealthCar ETF VHT Data as of March 31, 2008 12-16-98 06-12-00 11-13-01 10-12-06 09-20-06 01-26-04 0.23 0.48 0.49 0.71 0.75 0.22 –11.66 –11.06 –9.63 –15.75 –13.24 –11.42 –20.27 –16.96 –12.56 –15.75 –13.24 –11.42 57.12 51.07 50.84 25.51 63.61 48.14 47,398 34,420 53,052 5,063 48,480 31,691 on health care exceeded economic growth by about 3% per year on average. As a result, health care increased from 5% of the economy in 1960 to 16% in 2006. That’s the highest level of any developed country. SM: How long can health care maintain that pace of growth? AM: Such growth has to slow at some point, GDP vs. Health-Care Spending Growth: Data from the past 40 years show that there has been no significant statistical relationship between growth in health-care spending and gross domestic product growth. 18% GDP Growth Healthcare Spending Growth although it’s anyone’s guess when that will happen. Economic, industry, and political factors come into play here, and it’s difficult to make a prediction as to when health-care spending will slow. SM: Do you think health care will continue to 15 be recession-proof? AM: Well, my research isn’t a forecast. Even 12 9 6 though the sector has proved relatively insensitive to economic downturns in the past, there’s no guarantee that it will continue to behave that way in the future. The system also faces some serious risks, including the few we discussed above. K Sonya Morris is editor of the monthly newsletter Morningstar ETFInvestor. Subscribe at: http://www. morningstar.com/goto/Adv37 3 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 MorningstarAdvisor.com 75

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Morningstar Advisor - Spring 2008

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