Milliman’s New ETF Prescription for Rising Healthcare Inflation

Ballooning healthcare inflation causes pain for investors of every type. Joe O’Malley, External Senior ETF Salesperson at Milliman Financial Risk Management, talked the firm’s two impending ETFs that seek to address these pains with Sumit Roy, Senior ETF Analyst, at Future Proof Citywide. The funds include the Milliman Healthcare Inflation Guard ETF (MHIG) and the Milliman Healthcare Inflation Plus ETF (MHIP). 

Healthcare Inflation Is Twice Broader Inflation

Roy: Joe, how are you doing? Great to see you. 

O’Malley: I'm doing great. Great to be here. Thanks for having me. 

Roy: Absolutely. So, Joe, as you know, inflation has been a hot topic over the past several years. The CPI, PCE, they've also risen quite a bit over the past several years. But healthcare inflation in general has outpaced inflation overall. So I want to talk about this idea that portfolios as people have them right now —S&P 500 funds, broad market indexes — those don't insulate you from healthcare inflation specifically. Is that your argument?

O’Malley: Yeah I would agree with that. You've seen healthcare over the last 20 years has run double what overall inflation has. So it's a big concern for a lot of people.

Roy: And you have these two upcoming ETFs which I want to talk about. And they're specifically designed to help investors deal with healthcare inflation. Can you talk about those?

O’Malley: Yeah, we're excited to launch those. You know, one of the things that I think investors have really lacked as they try to plan around healthcare inflation is the lack of access to data. So you have things like medical CPI that is available. But medical CPI leaves out a lot of the important components and the things that are really impacting the rising costs of healthcare.

So it doesn't account for things like increases in utilization, doesn't factor in the different service mixes that are being used. And so that's where Milliman I think really comes in and can play an important role. Through our work as the preeminent healthcare actuary, we have unique insights into what is driving a lot of this inflation. And through that, we've created the Milliman Health Trend Guidelines, which really serve as a guide for our portfolio.

Roy: So you have all these data points and then you turn that into an actual portfolio. How does that work now?

O’Malley: Yeah. So, it’s an interesting challenge. You're taking something that is kind of a non-financial problem and you're using financial instruments to address that. So that's where a lot of our work on the asset management side comes into play. Milliman manages $240 billion, including a large sum of sub-advised ETFs. And through that, we've really done a lot of work in looking historically what are some ways that we can keep up with the health trend guidelines. And so we've identified different asset classes that we think will correlate strongly. 

So you have short-term and intermediate treasuries, you have gold exposure, a little bit of S&P 500 exposure. And then of course, can’t leave out healthcare companies.

Roy: Right, right. That's very interesting. So you have a mix of commodities stocks and bonds in these portfolios, right?

O’Malley: Yeah, absolutely. So we think diversification is going to be very important as we try to address that. So that's why you have a mix of these different asset classes. But going back to the Milliman Health Trend Guidelines, this provides us some really unique insights into what are some of the root causes of this and where there are some higher levels of inflation.

So take for example, more recently pharmaceutical inflation has run pretty high. So, through that we can put a stronger allocation to those pharmaceutical companies that are seeing the price increases. Things like GLP-1s are certainly a big factor in those rising costs. So we can allocate our portfolio alongside that and really, you know, execute on what we seek to do with these portfolios.

Under the Hood of MHIG and MHIP

Roy: So you have MHIG and MHIP, what’s the difference between the two?

O’Malley: Yeah, so the G would stand for guard and the P would stand for plus. So the guard is going to seek to track the Milliman Health Trend Guidelines. And then the plus will have a little bit more equity exposure and seek to exceed that a little bit.

Roy: And who do you think is the natural user of these funds. Is it different for the two different ETFs?

O’Malley: So the simple answer to that is anybody who is going to be affected by rising healthcare costs.

Roy: Pretty much anybody.

O’Malley: But that breaks down I think into two categories. One on the institutional side: so if you think of healthcare companies themselves that if you're an insurance company and you're trying to plan for liabilities, underestimating those liabilities due to rising costs can be, you know that can be pretty damaging to your capital account. So this is a way for them to invest along that and to try to protect against some of those rising health costs. 

On the other side you have individual investors. So you look at what are some of the biggest fears that people have in retirement: Running out of money. And then you dig deeper into that and you see there are fears of inflation and fears of rising healthcare costs causing them to run out of money. So, you know, this is something that can easily be used within a portfolio to help address those types of issues.

Roy: Fantastic. MHIG, MHIP, we need to keep a close eye on those. Joe, it's been an absolute pleasure. Thanks so much for your time.

O’Malley: Yeah, pleasure! Thanks. 

DISCLOSURE

The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors. Information herein has been obtained from sources we believe to be reliable but neither Milliman Financial Risk Management LLC (“Milliman FRM”) nor its parents, subsidiaries or affiliates warrant its completeness or accuracy. No responsibility can be accepted for errors of facts obtained from third parties.

The information, products, or services described or referenced herein are intended to be for informational purposes only. This material is not intended to be a recommendation, offer, solicitation or advertisement to buy or sell any securities, securities related product or service, or investment strategy, nor is it intended to be to be relied upon as a forecast, research or investment advice. 

The products or services described or referenced herein may not be suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient. Investment involves risks. Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting www.millimanfunds.com. Read the prospectus carefully before investing.

Milliman FRM is an SEC registered investment advisor (SEC#:801-73056) since 2012. You can find Milliman FRM’s ADV filings at https://adviserinfo.sec.gov/firm/summary/159377.

Milliman Health Trend Guidelines ™ – a series of indices providing data on the cost, utilization, and unit cost of healthcare services – both in total and broken down separately for professional services, inpatient and outpatient services, as well as prescription pharmaceuticals. Data used to calculate the indices is provided by leading commercial health insurance plans and data firms that cover approximately 60 million insured individuals. Data is lagged on a trailing 3-month basis and then combined with up-to-date economic data that is correlated with the costs of healthcare noted above and used to forecast expected claims data for these services in the future. It is important to note that the indices created through the Milliman Health Trend Guidelines are not standard market indices. They do not measure the price or total return performance of securities, but rather serve as a guideline as to expected changes in the general cost of healthcare. These expected changes inform the investment process for the Milliman Health Trend Managed Accounts.

Investment Products Offered: Are Not FDIC Insured | May Lose Value | Are Not Bank Guaranteed