Healthcare continues to generate political controversy. So should investors stay away? Absolutely not. What’s important is to target companies that are positioned to deliver long-term growth no matter what happens to the US healthcare system.

President Trump is determined to replace Obamacare to fulfill one of his central campaign promises. His proposals for the American Health Care Act are aimed at creating a system that would be “better and cheaper” than his predecessor’s.

As equity investors, we don’t take a stand in the political debate about the healthcare system. However, our search for US equity opportunities requires us to monitor developments while studying company fundamentals in order to determine whether there are long-term winners in a complicated and changing sector. Healthcare stocks have rallied by 10.9% this year through May, outpacing the S&P 500 Index’s 8.7%, so we believe investors who ignore the sector may be paying a hefty opportunity cost, in our view.

THE LONGEVITY FACTOR

Analyzing the healthcare sector must begin with some core facts. The good news is that Americans are generally living longer. The bad news is that extended life expectancies add costs to the healthcare system. So it’s possible to provide better care, and it’s possible to provide cheaper care, but it will be very challenging to do both, in our view.

US healthcare spending is very high compared to that of the rest of the world. Healthcare spending in the US accounted for 17% of GDP in 2016, much higher than the 6%–11% that many other developed countries spend and up from approximately 13% of GDP in 2000, according to the Organisation for Economic Co-operation and Development’s online database. Prescription drug spending is often seen as the culprit in skyrocketing US healthcare costs, yet it only represents 11% of total healthcare spending. In fact, the biggest absolute buckets of spending are hospital care at 34% of the total and physician services at 21%, based on data from the Centers for Medicare and Medicaid Services. So the question really is: how do we control healthcare costs without reducing the quality of care?