Sector Snap: Health care services downgraded

Health care stocks may no longer be a defensive play in an economic downturn, a Morgan Stanley analyst said Wednesday. He thinks higher costs and weaker government and employer spending have made the sector more risky for investors.

Analyst David Veal said health care spending isn't immune from economic challenges because consumers have fewer options with which to pay for the rising cost of care, businesses are shifting more expenses to employees, and governments may reduce their health care spending.

He downgraded the sector to "In-Line" from "Attractive."

Veal said expenses like premiums and copays are growing faster than consumer income, and patients may have trouble paying for those costs because home equity values and investment are down.

Meanwhile, states reduced their health care spending during the 2001 recession, Veal said, and that may happen again, as the federal government's growing debt makes it difficult to take on rising health care costs.

The 2005 Deficit Reduction Act, which reduced Medicare and Medicaid spending into 2015, "may only be a start," he wrote.

Within the sector, Veal prefers shares of pharmacy benefits managers like Express Scripts Inc., CVS Caremark Corp. and Medco Health Solutions Inc., and clinical lab operators like Laboratory Corp. of America Holdings.

The safest stocks do a significant amount of business overseas, don't rely much on government programs, and either lower costs or raise revenue from ailing patients, he wrote in a client note.

Veal also favors shares of health care products and services distributors Cardinal Health Inc. and Henry Schein Inc., and MedAssets Inc., which makes revenue and expense management software for hospitals.

He expressed caution on shares of dental and veterinary supply company Patterson Cos., and Omnicare Inc., which provides pharmacy services to nursing homes.

In afternoon trading, Express Scripts shares lost $1.49, or 2.3 percent, to $64.86. Pharmaceutical and health care products distributor McKesson Corp. slipped 91 cents to $46.07.

Shares of drug distributor AmerisourceBergen Corp. fell $1.33, or 3.3 percent, to $39.62. Lab operator Quest Diagnostics Inc. shed $1.03, or 2.1 percent, to $48.06.