How to make money from US healthcare
It's angry-mob time again. After a summer of fulminating against evil bankers and tacky politicians, we have a new group of villains to wring our hands over - healthcare executives. But there is one ray of light in the sector, where investors can put their money with a clear conscience.
It's angry-mob time again. After a summer of fulminating against evil bankers and tacky politicians, we have a new group of villains to wring our hands over - healthcare executives.
In this month's Vanity Fair, Matt Kapp launches an all-out attack on healthcare executives and "the sick business of healthcare profiteering".
What a bunch they are. With a median annual salary of more than $12.4m, CEOs at the big healthcare groups make two-thirds more than their counterparts in finance. And as Kapp says of health insurers, while "gambling investors' money on exotic securities in pursuit of outsize returns may be a dubious profit model what could be worse than the health-insurance industry's core model: screwing sick people to boost margins."
But even if you're not concerned about the ethics of the business model, the truth is that much of that money goes to their executives rather than their shareholders. Not to mention lobbying Congress, or paying billions in fines for dirty tricks such as bribing doctors for patient referrals, grossly overcharging for hospital tests or simply keeping psychiatric patients in hospital against their will.
Medical property - a ray of light in the healthcare sector
But Knapp does find one ray of light in the sector for investors - medical property. Hospital and healthcare facility landlords have a habit of delivering double-digit returns on investor's money. Last year, they ranked second out of 215 industries in terms of profitability, behind only the beverage business, with a 24.6% average profit margin.
It's an area we like ourselves. The benefit of a medical building compared to a shopping mall, is that a healthcare tenant is likely to stay put longer. Changing locations can be difficult for physicians, with pricy medical equipment installed in their units. So while the average office lease is three to five years, medical office leases are routinely eight to ten years.
And, as a bonus to investing in medical property, you won't have to face quite the same ethical concerns as you might have when you invest in a US insurer.
Last year we tipped Medical Properties Trust (NYSE: MPW), which maintains a 24.9% profit margin. The group owns 51 healthcare facilities, including long-term acute care hospitals (72% of its properties), heart surgery centres, orthopaedic hospitals and cancer treatment centres. The stock still looks good on a forward price/earnings ratio of eight and a 10% dividend yield.