Health care costs are expected to remain a source of headaches, anxiety and indigestion for Americans for the foreseeable future, but a number of health-related companies might make socially responsible investors feel a little better.

Domini Social Investments, a New York-based investment firm specializing exclusively in socially responsible investing, recently completed extensive reviews of the pharmaceutical industry and the health care and equipment services industry. The latter includes health insurance companies, medical device manufacturers, and hospital groups.

Domini is most enthusiastic about pharmaceutical companies focused on vaccines, preventative drugs, initiatives for developing countries, and less costly generic drugs. Some medical device makers also have SRI appeal. But health insurers and hospital groups get a thumbs-down. 

"There's nothing in health care or pharmaceuticals that we (automatically) say we'll never invest in. We always review with an open mind, but we can never find (a health insurer) that works," says Tessie Petion, a global lead research analyst at Domini. Their denial of coverage practices, often inconsistent and arbitrary, aren't viewed as socially responsible.

With hospitals, studies show that for-profit groups in the U.S. have poorer success rates, higher costs and more safety issues. Petion points to a December 2010 Atlantic article that exposes deep troubles at for-profit dialysis clinics.

How will health care reform influence investment opportunities? "It's too soon to know how it'll affect companies," says Petion. To date, 26 states have sued the federal government regarding the Patient Protection and Affordable Care Act, signed into law by President Obama last March. "In theory, we like the idea that managed care will have to provide coverage. That's a good thing from our perspective. We'll keep an eye on this," she says. 

Petion prefers to see pharmaceutical companies devote research and development (R&D) towards new drugs that offer societal benefits, like better HIV and malaria treatments, rather than in "me too" drugs that try to emulate rivals' blockbusters in the lifestyle space (think Viagra). She also reviews the safety concerns of all drugs. Her favorite drug makers include Sanofi-Aventis, Gilead Sciences and Novartis.

The vaccine division of Sanofi-Aventis' (NYSE: SNY) is the world's largest company devoted exclusively to human vaccines. Its vaccine to prevent dengue fever, a mosquito-borne disease that infects 220 million people a year, is in its final stages of clinical development, says Petion. Another plus she sees: the company has a unit devoted to malaria research.

Gilead (NASDAQ: GILD) wins praise from Petion for its tiered pricing system which makes its drugs affordable to developing nations. Its primary areas of focus are HIV/AIDS, liver disease, and serious cardiovascular/metabolic and respiratory conditions.

Petion likes how Novartis (NYSE: NVS), the world's second largest producer of generic pharmaceuticals, balances revenues from generic and patent-protected drugs. It has the best anti-malaria drugs on the market and is in trials for better ones, she says. It sells its anti-malaria drugs at cost, which is good for society. The Novartis Institute of Tropical Diseases also has tuberculosis and dengue units.

Petion likes the transparency biotechnology company Amgen (which focuses on cancer, kidney and bone diseases) provides for its research and drug trials. Still, she has some concerns about its issues with overcharging and recalls.  She does note that most drug companies face some minor recalls, and there will always be adverse effects for some drugs. But with vaccines and critical drugs that lack alternatives on the market, the "greater good argument" often prevails, she says. 

Pharmaceutical firms that scored poorly on Domini's SRI review include Pfizer and Glaxo SmithKline. Pfizer has pled guilty to defrauding Medicaid and Medicare, and has had ethical issues with drug trials in Nigeria. Glaxo has been a "horror show" the past two years, says Petion. It paid settlements of $1 billion for birth defects linked to antidepressant Paxil and $750 million for drug contamination. It may still be subject to class actions on behalf of customers.

As for trends, Petion says companies worldwide are being asked to meet a higher burden of proof that new drugs have better success rates than existing drugs. Between this and the likelihood of tighter reimbursement rates, they may shift more R&D to lifestyle drugs that consumers are willing to pay more for. "That concerns us as socially responsible investors," she says. "There's a place for everything," but we don't want to see ethical drugs suffer, she says.

With medical devices companies, Domini prefers those that produce less invasive devices that are less likely to cause harm. That's partly because some health industry experts feel the U.S. Food & Drug Administration testing and approval process isn't stringent enough, says Petion.

A favorite is Smith & Nephew (NYSE: SNN), a U.K.-based producer of joint implants, wound care treatment and prevention products, and endoscopic equipment that minimizes incisions and recovery times. She also likes Sonova Holding (SOON on the Swiss Stock Exchange), a leader of hearing solutions. It supports hearing education programs and social projects that improve the quality of life for people with hearing impairment, especially children.

-- By Jerilyn Klein Bier