As the U.S. Supreme Court mulls the fate of President Barack Obama’s signature health reform law, the way these six men and three women eventually rule could have a significant impact on the stocks of managed care companies. And in almost every scenario but one, managed care companies could come out winners.
If the entire Affordable Care Act wins the constitutional challenge, managed care companies and insurers win big because they get to divvy up as many as 32 million new customers who’ll be required by law to buy health insurance — many of them young and healthy. That should more than offset any losses incurred by the requirement that the companies accept those with preexisting conditions or health risk factors.
If the entire law is ruled unconstitutional, managed care companies basically will deal with the status quo. While the government can and will make changes to Medicare and Medicaid, health reform advocates likely will need to regroup and find another approach. Managed care companies will still be able to price for risk and establish their own acceptance policies.
The bad news scenario: If the Supreme Court strikes down the most contentious part of the law — the so-called “individual mandate” — while letting stand the requirement that managed care plans must accept all applicants regardless of preexisting medical conditions, health risk factors or age.
In the carrot-and-stick of health care reform, guaranteed coverage is the carrot, but the individual mandate is a stick the size of a steel girder. Under the mandate, virtually every American would be required to buy into a health plan or face a tax penalty. If managed care companies are forced to accept everyone, they need the individual mandate to bring in young, healthy individuals — or they’ll lose big.
And the most endangered clause in the ACA is clearly the individual mandate. Opponents argue that it’s unconstitutional to penalize an individual for not buying a good or service. Although states mandate auto insurance for all drivers, opponents note that you can opt out of that mandate simply by not driving.
The High Court is expected to rule on the ACA as early as this month. Since its rulings are often inscrutable but seldom stupid, it’s hard to imagine the ACA surviving with the health coverage guarantee intact and the individual mandate stripped out.
These justices understand the impact of their decisions on the free market — and on the stock market. But if they do what the ancient King Solomon proposed and “split the baby in half,” I don’t like any managed care stocks in the short term.
That said, I think the odds are better that the High Court will temper its judgment and give managed care companies something they can live with — at least until the next group of politicians starts tinkering with the system. That means health plans and hospitals like those named here should do well. In addition, here are three managed care companies that could win big if Obamacare clears the Supreme Court’s hurdle intact:
United Health Group
The nation’s largest health plan, United Health (NYSE:UNH) provides health services to nearly 80 million Americans. Its lines of business run the gamut from large- and small-business health benefit plans to acute and long-term Medicaid through a network of more than 750,000 doctors and health professionals and nearly 5,500 hospitals. It also provides specialty benefits like vision and dental through its OptumHealth and OptumRx health and benefit management units. UNH also offers health plan management for self-insured employers.
UNH scored a coup in March when the Department of Defense awarded it a five-year, $20 billion contract to administer the Pentagon’s Tricare health benefits program for active-duty military and retirees in the 21-state West region beginning next April. The contract will give UNH nearly 3 million more customers and $1.4 billion in additional sales over the next five years. The former contractor, TriWest Healthcare Alliance, is protesting the award
UNH is trading around $55, 33% above its 52-week low last August. The stock has a price-to-earnings growth ratio of 1, indicating it’s fairly valued, though its forward P/E of 11 is on the high side of the sector.
UNH has size, market power and a flair for innovation — including a new online medical pricing program that lets members “shop” out-of-pocket costs for common medical procedures. It also sports a modest dividend of 1.2%. Buy UNH with a price target of $64.