The healthcare industry, represented by the healthcare Select Sector SPDR ETF (XLV), comprises four interrelated sub-industries: the healthcare provider industry, the health insurance industry, the pharmaceutical industry, and the medical device and equipment industry.
In the US, unlike other services (which are paid for by the end user), healthcare providers are mainly reimbursed by the health insurance industry. The health insurance industry is broad, comprising government programs, commercial insurers, self-insurers, and managed care companies such as health maintenance organizations (or HMOs), which incorporate both insurance and healthcare services.
History
The health insurance industry in the US originated during the Great Depression, when hospitals and physicians started implementing insurance as a means to assure payment for services. The plans expanded from single hospitals and became multi-hospital packages. The system adopted the official name of the Blue Cross in 1939. Blue Shield plans were developed in a similar fashion by physician groups.
Commercial health insurers made their presence known in the US market post–World War II, when workers started demanding health insurance as a fringe benefit from employers, called “employer-sponsored insurance.” Medicare, a government insurance program mainly for people above the age of 65, was introduced in 1965. In the same year, Medicaid was created as a social program providing insurance to low-income people.
The 1980s witnessed growth of managed care plans as a means of controlling healthcare costs. In the 1990s, there were several M&As (mergers and acquisitions) and the restructuring of both the Blue Cross and Blue Shield as well as commercial insurers. This has consolidated the health insurance market, which is now dominated by a few players.
Key playersThe above graph shows that major managed care players such as Aetna (AET), Anthem (ANTM), and Cigna (CI) have provided an annualized return of 9.3%, 9.3%, and 2.8%, respectively, while key traditional health insurers Lincoln National and MetLife (MET) provided an annual return of 1.4% and 4.6%, respectively, from October 2001 to January 2015.
