Today’s Managing Health Care Costs Number is 325%
Koop Portfolio vs. S&P 500
Researchers in the Journal of Occupational and Environmental Medicine report that companies that have won the C Everett Koop Award for workplace wellness program appreciated over three times more (325%) than the S&P 500 stock average (105%) over a 14 year period. The association is strong – although the number of companies is small (and this was through 2014 – so the early 2016 stock market slump was not included.)
A complementary study also published in JOEM evaluated the stock market performance of a portfolio of companies with high HERO (Health Enhancement Research Organization) scores with the S&P 500 over 6 years from 2009-2015. The HERO study blinds company names.
HERO Portfolio vs. S&P 500
There are three plausible hypotheses for the association between the Koop Award and stock appreciation.
1. Null hypothesis. This could be just the result of chance. We’re talking about just 26 publicly traded companies – and an arbitrary slice of time. Perhaps a greater number of companies or a longer period of time would erase this apparent association.
2. Wellness programs genuinely raise the stock price of publicly traded companies. That would be great news for the wellness industry, which some believe has $8 billion in revenue a year.
3. Companies that are successful are more likely to invest not just in wellness programs, but in the administrative effort to obtain the C Everett Koop Award.
4. Researcher bias. The researchers are well respected, and I doubt that they would have knowingly made discretionary decisions to bias results. However, the researchers are all advocates of the wellness industry, and it’s hard to rule out unconscious bias. An example: The researchers decided to initiate their portfolio 3 years before the Koop Award for most companies, but the year of the Koop Award for the 2000 awardees. For Aetna, that meant the baseline stock price was full 30% lower. This allowed a lot more room for future appreciation.
The authors acknowledge that association is not equal to causality.
The main criticism of this and similar analytic methods concerns the issue of reverse causality. Our analysis posits that providing best in class, comprehensive, and cost-beneficial workplace health promotion programs leads to a more effective workforce and thereby a more successful enterprise. The reverse may be true. It may be that effective companies with good management, attractive products and services, and cutting-edge innovation decide to offer these programs because they can afford to do so and they have the fortitude to build and maintain a great wellness program
There are some reasons to be dubious about the hypothesis that programs that lead to the Koop Award also lead to more stock appreciation. Some critics have pointed out that the C Everett Koop Award was bestowed on recipients based on falsified data in at least one case. Rigorous studies of ROI of traditional wellness programs fail to show a medical claims cost benefit – so either there is a corporate benefit outside of saving medical costs, or investors are rewarding companies for wellness programs even though they are not financially advantageous for sponsor companies.
The researchers note that the price to earnings ratio of Koop Award winners is actually lower than the overall S&P 500 – indicating that investors are not paying a premium for these companies. Dividends are higher – but that has more to do with company stage and industry than company success. Google’sdividend is zero for example, but it handily outperformed the Koop portfolio since its stock was first listed 12 years ago.
The authors also suggest that the small sample size is a ‘strength’ of their study – comparing the Koop portfolio with the 30-company Dow Jones Index. There is substantial evidence that the Dow Jones is a terrible indicator of what’s going on in the economy – so I’d discount this claim. Frankly, a larger sample size would be more credible than a smaller sample size.
I’m not even sure that the Koop Award routinely recognizes the ‘best’ wellness programs in the country. It rather recognizes those companies with credible programs who are connected within the wellness industry andwho are willing to make the effort to apply for this award. Further, programs that won an award 10-12 years ago have often sunsetted, and it’s not clear that the companies that were market-leading in wellness programs in 2000 retain that edge.
There is a long history of creating portfolios of companies with specific attributes and comparing them to the market. Jim Collins did this in Good to Greatin 2001. His list included Fannie Mae and Circuit City, among others. Steve Levitt, in Freakonomics, pointed out that an investment in the “Good to Great” portfolio in 2001 would have underperformed the stock market.
Stock price is based on investor projection of future cash flows from the corporation. The authors note that “it is unlikely that investors in general are aware of the Koop Award and its implications for business.” Clearly you wouldn’t conclude the award itself causes stock appreciation! It’s a more tenuous connection to believe that the programs underlying the award are responsible for outsized stock appreciation.
We shouldn’t make our investment decisions based on whether or not a company has won a Koop Award. The share price is based on overall anticipated company performance – and wellness programs are a very small portion of this.
We also shouldn’t judge the effectiveness of a wellness program by the firm’s share price. We should look to well-designed studies showing whether or not employer wellness programs actually work – not retrospective theoretical performance of a tiny stock portfolio.
