The Hindu Business Line : Can investment portfolios pay health-care costs?

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Can investment portfolios pay health-care costs?

B. Venkatesh

Health-care costs are a significant proportion of our lifestyle expenses. Yet, insurance companies do not typically cover costs incurred by individuals due to pre-existing illness. How can individuals hedge such costs?

This article discusses how individuals can create an investment portfolio that can help meet the costs of pre-existing illness. Such a portfolio can be set-up as a lump-sum investment or as a systematic investment plan. This home-made health insurance is a good supplement to the medical insurance policy.

Hedge for illness

Health-care costs can occur at any age. It is, therefore, important to hedge such risks. Salaried individuals receive medical benefits from their employers. In most cases, such benefits are limited to some proportion of the total salary. It, therefore, pays for all individuals to take medical insurance.

Such insurance policy supplements the total costs incurred by individuals who have limited employee benefit programs. For others, medical insurance is the only hedge for illness costs.

But what if an individual has pre-existing illness? This could range from a non-threatening ailment to a more serious illness like a heart condition. Insurance companies typically do not cover such pre-existing illness or impose several conditions for such coverage. Individuals should, hence, look to the financial markets to hedge this risk.

A home-made health investment portfolio has to perform two objectives — help hedge inflation in health-care costs and fund the costs suffered due to pre-existing illness.

Consider inflation risk. This is the risk that the health-care costs go up each year. Logically, the portfolio has to contain some exposure to health-care companies through direct exposure to such stocks or through sector mutual funds.

The rationale is that health-care costs could go up because health-care companies increase their product prices. This could increase the net earnings of such companies, translating into higher cash dividends or stock price appreciation.

But having health-care companies in the portfolio may at best hedge only the inflation costs. What about the primary objective of meeting the costs of pre-existing illness?

Lumpsum investment

The optimal solution would be to combine health-care sector funds with money market funds. The latter are funds that invest in fixed-income instruments that have maturity of less than one year. Importantly, they do not carry price risk and can be converted into cash easily.

Exposure to such a portfolio requires lump-sum investment. Investors should set aside at least twice the sum assured under their medical insurance to meet costs of pre-existing illness. So, if a medical insurance covers other illness for Rs 2 lakh, the lump-sum investment for pre-existing illness should be for Rs 4 lakh.

Unfortunately, not all investors may have lump-sum amount to invest in money market funds. That is why constructing a higher-returns-generating investment portfolio is important.

Pure-equity portfolio?

Such a portfolio should contain index funds and health-care sector funds. A health-care investment portfolio is quite unlike a portfolio set-up to buy a house or fund higher education. The investment horizon can be clearly defined for buying a house. This helps in fixing the required returns based on initial investment and periodic contributions.

Medical expenses are mostly emergency costs. Investment horizon is uncertain. So, expected returns are difficult to calculate. This means investors cannot take advantage of finite life of bonds to match cash flows at the horizon.

The portfolio will, hence, contain only equity exposure. True, such an exposure will carry higher price risk. But the risk can be moderated with cash in savings account or in emergency funds (other than medical).

Conclusion

The health-care investment portfolio will help investors face medical emergency after two-three years of seasoning; for the portfolio requires time to build assets. That is why such a portfolio cannot be a substitute for medical insurance. Contribution to the health-care funds and index funds can be made monthly through a systematic investment plan.

(The author is the founder of Navera Consulting, a firm that offers wealth-mapping and investor-learning solutions. He can be reached at enhancek@gmail.com)

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