How to Profit from Exploding Government Healthcare Costs

A report released on Thursday predicts that government spending on healthcare will rise dramatically over the next decade. Despite all the talk in Washington about cutting hundreds of billions of dollars in annual spending in order to reduce the deficit, the government's share of the national healthcare spending is expected to increase from nearly 45% last year to about 50% by the year 2020. The report from the Centers for Medicare & Medicaid Services (CMS), previously known as the Health Care Financing Administration (HCFA) says that spending on healthcare will increase an average of 5.8% over the next decade, far above the expected growth rate of the US economy. One of the main drivers of the growth in healthcare spending will be President Barack Obama's healthcare reform, which will allow millions of previously uninsured people to obtain insurance benefits funded in part by government subsidies. With nearly 30 million people expected to benefit from healthcare reform, the cost to the government will surge as America's healthcare expenditures nearly double from last year's $2.6 trillion to almost $4.6 trillion in 2020. The newly insured will be younger and healthier on average than those currently insured, so more of their spending is expected to be on prescription drugs and physician services than on actual hospital visits. This suggests that investors with a long term view may want to focus on companies in the health sector that are poised to profit off this demographic change. Pharmaceutical giants like Johnson & Johnson JNJ, Pfizer PFE, Merck & Co. MRK and Abbott Laboratories ABT are probably the safest bets in the pharmaceutical sector. These well established companies have a long history of producing profits and will benefit if national pharmaceutical spending rises. Some investors might prefer companies that have more upside. These investors should take a look at companies like Acorda Therapeutics (Nasdaq ACOR), Par Pharmaceutical Companies PRX, VIVUS VVUS and Orexigen Therapeutics OREX. All of these small cap stocks trades above their average 12-month price targets, have much more potential upside than the giant drug companies and are far more likely to be acquired by one of the bigger companies looking to buy growth and innovation. For those who prefer diversification over stock picking, there are ETFs like the Health Care Select Sector SPDR Fund XLV and the ProShares Ultra Health Care RXL. These two ETFs will likely rise over the next decade and may best the broader market as healthcare spending takes up an ever increasing part of consumers' budgets. However, some investors may feel that the inevitable budget cuts that President Barack Obama and the United States Congress will eventually agree to will lead to an overall reduction in national spending on healthcare. These investors could short individual stocks or instead lower their risk by buying the ProShares UltraShort Health Care Fund RXD. If healthcare spending actually takes a hit because the federal government drastically lowers spending, this ETF should climb higher.