Countdown to the Election: The Candidates on Healthcare

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Ailing healthcare system
Once the most advanced of its kind in the world, the US healthcare system has descended into a dizzying array of many different forms of insurance. Approximately 65% of all health insurance is purchased through the private marketplace while the rest is sponsored and mostly paid for by government: Medicare, Medicaid, veterans, Native American and state children's health plans, just to name a few. Still, even with all these programs, the US healthcare system comes up short and a significant number of Americans go uninsured.

The Affordable Care Act (ACA), more commonly known as Obamacare, was passed with great controversy and by a slim margin in 2010 with no Republicans voting for the bill. From the start, the legislation was viewed as an imperfect compromise even by its progressive supporters, some lamenting that it did not create a public health system as in the United Kingdom, but instead utilized private insurance companies to create a hybrid system. This was necessary as a number of moderate Democratic legislators were unwilling to support a public health system, believing it would impair healthcare services and hurt the economy.

The intention behind the Affordable Care Act was simple: to provide healthcare coverage at an affordable price for all Americans. Since then it has arguably received far more criticism than praise, with even prominent Democrats admitting it is very flawed. However, it has had some success in achieving its goal: according to Gallup the percentage of adults who were uninsured or underinsured dropped from 18% in 2013 to 11% in early 2016.

History-making healthcare
To put this into context, the ACA represents the largest expansion of healthcare coverage since the creation of Medicare and Medicaid in 1965. The key provision of ACA is that any person not covered by health insurance (either by an employer-sponsored health plan, Medicaid, Medicare or other public insurance programs such as Tricare) is mandated to obtain health insurance or pay a penalty. The idea behind the mandate is to create a balanced pool of those who will be unlikely to have significant healthcare needs—i.e., the young, who are less likely to get insurance for just that reason—and those who will be likely to have significant healthcare needs or already are sick.

A more balanced pool makes it more attractive for health insurers to offer insurance via the ACA given the prevailing premium rates. Other incentives were also created to encourage health insurance companies to participate, including some risk controls. Conversely, safeguards were also included in the act to prevent discrimination against individuals with serious illnesses, as well as provisions to control costs. For example, premiums for older applicants can be no more than three times the cost of premiums for the youngest applicants.

However, all has not worked out as planned. To put it simply, many young people have opted to pay the penalty rather than purchase health insurance, which has skewed the overall pool of insureds. Additionally, many individuals chose to wait to sign up until they became ill, requiring significant medical care and incurring loss-generating costs. As a result, premium costs have gone up significantly, making health insurance policies far less affordable or, in some cases, unaffordable for applicants. And some insurance companies have withdrawn from the healthcare exchanges in some states.

Further, most of the growth in healthcare coverage since the ACA was enacted resulted not from the exchanges but instead from the vast expansion of Medicaid, which unfortunately has low reimbursement rates and has placed greater cost pressure on hospitals and doctors, a significant number of whom do not treat Medicaid patients. It is in this environment that the presidential race of 2016 has unfolded.

The candidates’ policy prescriptions
The Clinton position on the ACA is that it has done its job in expanding the availability of health insurance coverage to an increased number of Americans. Republicans would retort that the overwhelming portion of the expansion occurred because of the massive increase in Medicaid rolls and this might mean having a certificate of insurance but not necessarily medical access. They also cite the fact that insurance prices in the individual markets have skyrocketed despite the fact that deductibles have also increased. Secretary Clinton says she will build upon the foundation of ACA to improve its deficiencies.

She will be pushed by some progressive Democrats to move to a single payer system, but she is unlikely to do that. It is both politically unappealing and also would be opposed by Congressional Republicans who will likely be in control of the House of Representatives. An area of focus for her could be the high prescription prices of pharmaceuticals, given that is an endeavor that would find far more support from voters on both sides of the aisle—and their representatives in Congress.

The Trump position on the ACA is far more negative. Mr. Trump is a strong opponent and says he will repeal the ACA but replace it with something else—although on this as on so many other areas, he has provided few specifics on what that replacement would look like. One of the components of the ACA which he and most Republicans agree with is that no one can be barred from purchasing insurance because of pre-existing conditions. This fundamental premise makes it difficult to rely exclusively on a free market solution, as the risk pooling mechanism becomes compromised as companies seek those applications who are younger and healthier and avoid those who are older and less healthy.

Investment implications
In the event of a Clinton victory, she plans to maintain but improve the ACA, which is in need of critical care as many insurers have pulled out due to lack of profitability. However, she may find little support with a Republican Congress. She may also look to more heavily regulate the biotech/pharmaceutical space, so an underweighting here and careful stock selection makes sense. However, this should also be balanced by the fact that an aging population will continue to result in more demand, and that the major areas of regulation will probably be limited to alleged "price gouging."

Trump, on the other hand, wants to repeal the ACA in its entirety. His somewhat obscure plan would allow people to buy health insurance across state lines. In the event of a Trump presidency, an underweighting of hospitals may be just the right prescription for investors in the healthcare sector given a possible rollback of the ACA, while a Clinton presidency is likely to be more positive for hospitals.

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About the Authors
Kristina Hooper is the US investment strategist and Head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law, a master's degree from Cornell University and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

Peter Lefkin is the senior vice president of governmental and external affairs with Allianz of America Corporation, which he joined in 1988. He leads the firm’s state and federal lobbying efforts in the US. Mr. Lefkin has a B.S.F.S, cum laude, from the Georgetown University School of Foreign Service, and a master’s in public administration and a J.D. from Syracuse University.

Important Information
This material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.

A Word About Risk
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