Okay, I'm exaggerating but an overall gain of 6% when the broader indexes are up 14% for the year isn't exactly a shot in the arm.

For much of 2006, the health care sector, particularly the biopharmaceutical sector, found itself fighting myriad problems: anemic pipelines, widespread patent expirations; higher costs, and a slew of legal and regulatory threats that saw no shortage of industry lawyers in the courtrooms and in front of Congressional panels for much of the year. Not helping the industry was the election of a Democratic Congress, which triggered a four point drop in the American Stock Exchange Biotech Index in the days after the November election.

But that was then and this now.

With the stock market cratering last Tuesday, a recent series of iffy economic reports, and seemingly contrasting views on the direction of the U.S. economy between the current and former Federal Reserve Chairmen, health care looks like a strong defensive play in 2007. Analysts project that the S&P Healthcare index will post an earnings increase of 11% in 2007, compared with 5% profit growth for the S&P 500.

That, among other factors, could put a stake in a health care mutual fund or exchange-traded fund (ETF) in play – a good defensive stance when investors are taking a hands-off approach to more aggressive sectors.

Healthy Sector

There's more to the health care sector than just bad economic news and a spat between Ben Bernanke and Alan Greenspan. Sure, with U.S. economic growth faltering a bit, a defensive sector like health care should attract more attention. There is also plenty of good news coming out of the sector in 2007, most notably:

• Strong valuations
• Tighter cost controls
• A slate of impressive new drug development pipelines
• Solid balance sheets

A host of sector analysts see the same scenario I do.

Says Global Insight, the Boston-based analytical group: "Among the 10 sectors that comprise the U.S. stock market, the healthcare sector currently has the best attributes for an overweight position, from both the fundamental and risk perspectives. This is due to the robust prospects for strong growth in earnings and free cash flow that result from positive demographics, new technology, faster sales, and positive pricing power."

Much of the bullish attention on the sector is honing in on biotech, where the historically volatile industry seems to be calming down and shaping up in '07. "We see impressive pipelines and we've seen an increase in biotech's willingness to charge and receive premium pricing," says Eric Schmidt, a managing director at Cowen who is bullish on health care this year.

A good, safe fund like the Vanguard Health Care Fund fits well in this increasingly rosy scenario. Fund manager Ed Owens is a veteran, steady hand at the helm – he's been with the fund since 1984.

The guy knows the landscape. Take 2006 -- in  a year when health care stocks underperformed relative to other key S&P Indexes, Owens looked overseas to the fund's European and Japanese pharma holdings, such as Roche and Takeda Chemical, which helped pump up returns and help the fund outperform last year. (The fund returned 10.87% last year, well ahead of its benchmark S&P Healthcare index).

Adaptability is Owens' calling card – for example, the fund averages about 30% of its holdings from overseas companies – and it has paid off handsomely over the years for fund investors.

It all adds up to a major long-term buying opportunity in 2007. The key ingredients are all there – an economy expected to slow in 2007, a record-number of Baby Boomers hitting 60, and a market move away from aggressive stocks and into defensive ones.

Consequently, I see an unstoppable trend with health care stocks in 2007.

 

As a small business owner, I’m constantly amazed at the rising cost of health care.

Currently, the cost for health care coverage under my plan with Aetna is $770 per month. And believe me, it’s a fairly bare-bones plan.

So I’ve been thinking about those new health care savings accounts (HSA's). In my research I found a report this week from the Conference Board that says such plans are growing by leaps and bounds.

But they could even be more popular if the health care industry did a better job explaining how health care savings plans work – and offered a wider variety of them.

 “If people find the information they’re offered about HSA plans too confusing, the programs will fail,” says Jon Gabel, author of The Conference Board report and senior fellow at the National Opinion Research Center. “People are unlikely to switch to plans that they don’t understand.”

Also known as consumer-driven healthcare plan, health care savings accounts are a high-deductible health plan combined with a tax-advantaged spending account. HSA's, which were created by the Medicare Prescription Drug Improvement and Modernization Act of 2003, are individually-owned and fully-portable spending accounts. Employer contributions to HSA's are optional.

The data I found mostly relates to employees who use such plans, although small business owners and self-employed people can use them, too. But the numbers look much better from a savings point of view.

The Board reports that in 2005, about 2.4 million U.S. workers, or 3.5 percent of employees with job-based insurance, were enrolled in a consumer-driven healthcare plan. An average had a deductible of approximately $1,900 and an employer contribution of $553 in HSA plans – annually.

Compare that to my $770 per month and now we’re getting somewhere.

In the five case studies included in the Conference Board report, three of the plans included experienced lower increases in medical claims expenses during the first year of operation (compared to traditional health care plans). What does drive the cost of HSA’s up is catastrophic illness. Some companies experienced increases in claims expenses related to such illnesses that were similar to or higher than those in traditional plans, the Board reports.

I’ll keep my eye on health care savings plans and report back accordingly. But what I’m seeing right now is that HSA’s represent a significant cost savings compared to traditional health plans, although that cost could rise if you or someone on your family has a serious illness or injury.

In that regard, I guess you could call HSA’s the “fingers crossed” plans. We’ll see if that’s really the case.