Healthcare Services Stocks

About Healthcare Services Stocks

This is the least glamorous part of healthcare and it contains some genuinely excellent businesses. Drug distribution in particular is close to an oligopoly moving enormous volumes on razor-thin margins, which sounds unappealing and has compounded very well.

Read the margins, not the revenue. A distributor books the full price of the medicines passing through it, so the top line is gigantic and almost meaningless. A hospital books whatever an insurer agreed to pay, which is never the posted price. Comparing two companies here on revenue tells you nothing at all.

Everything in the group depends on someone else paying. Reimbursement rates, the mix between government programs and commercial insurance, and policy changes move earnings without a single extra patient walking through the door, which is why the sector trades at a discount and stays there. Labor is the other pressure, since most of these businesses run on clinicians whose wages are set in a tight market and cannot easily be passed on.

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