There is a lot of talk about healthcare these days, and much of it is coming from the executive branch as President Obama has begun the task of overhauling the industry.  Costs have escalated at a much faster rate than that of inflation over the past few years, and there is a wide variety of prescriptions to fix the problems.  Politicians are grappling with the details but the goals are clear: improve efficiency, reduce the number of uninsured, and reduce costs for care and drugs.  These have often been the fodder for political speeches for both parties, but it is clear that with the panic in the economy subsiding, healthcare is quickly moving to the top of the agenda on Capital Hill.  Beyond the obvious effect on the health of our countries citizens, new legislation will undoubtedly have wide reaching effects on the U.S. economy as well.  In 2007, spending on healthcare accounted for an amazing 17% of our nation’s GDP, which equates to $7900 per capital according to the National Coalition on Healthcare.

It is not surprising that with this much of our national economy potentially in a period of transition the financial markets are abuzz with activity.  There is one rule that is almost impossible to ignore in this case: the stock market hates uncertainty.  With Washington DC focused on changing the healthcare business, there is a mounting sense of unease surrounding the stocks of public companies in the sector.  Affirming this trend, an article from Bloomberg.com suggests that short selling activity has increased recently, particularly in Healthcare stocks such as Merck (MRK) and Cardinal Health (CAH).

Bets against the Standard & Poor’s 500 Index rose for the first time since March as investors increased short sales of health-care companies including Merck & Co. and Cardinal Health Inc.

Short interest on the S&P 500 climbed to 9.8 billion shares as of June 15, a gain of almost 1 percent from two weeks earlier, according to data compiled by U.S. exchanges and Bloomberg and released yesterday. Wagers against health-care shares rose more than 7 percent, the most of 10 groups, to 890.3 million as President Barack Obama proposed an industry overhaul.

“Anything that’s done could be detrimental to the health- care industry in terms of long-term business prospects,” said Michael Cuggino, who as chief executive officer of San Francisco-based Pacific Heights Asset Management LLC helps manage $3.8 billion. “There’s unease. What policies are ultimately passed could be limiting future earnings of certain companies.”

Coincidentally, we have the Healthcare sector rated as the most attractive sector out of the ten broad sectors we rank in terms of valuation (see the chart to the right).  In the last 3 months the sector has performed well advancing more than 37%, outpaced only by the Services sector.  However, the prospect of legislation means that all of our historical evidence must be taken with a grain of salt.  There is no way, at this early stage, that we can have any idea how any legislation might effect corporate earnings in the sector, but you can expect that there will be increased volatility because of the amount of interest that will be generated when news on this topic breaks.  At this point, all we can say is be prepared for a bumpy ride in healthcare, and the professionals are increasingly placing there bets to the downside.