The Obamacare Ruling: 5 Investing Scenarios

The Supreme Court's decision will surely create winners and losers

As the U.S. Supreme Court prepares to rule on the constitutionality of the Affordable Care Act (ACA) this month, the stakes are high for all Americans — not to mention politicians in a presidential election year. What these nine justices decide, and exactly how they craft their lengthy opinion, will also have a huge impact on health sector investors.

The court should announce the fate of the 2,700-page ACA, now also known as Obamacare, by June’s end. Even so, Wall Street likely won’t know the full impact as the news breaks. That’s because the justices must rule on multiple constitutional questions in three different cases: National Federation of Independent Business v. Sebelius; Department of Health and Human Services v. Florida; and Florida v. Department of Health and Human Services.

In those three lawsuits, the court must decide four questions, and the future of health care reform hinges on their ruling for each one.

1. Does the Anti-Injunction Act apply? The Anti-Injunction Act says citizens can’t sue the government over a tax or penalty that hasn’t yet taken effect. If the High Court rules that this act applies to Obamacare, opponents can’t challenge the law until the individual mandate’s penalty takes effect in 2014, or 2015 when the actual tax is due. If the court says “yes” here, it’s game over for the remaining three questions.

2. Is the “individual mandate” Constitutional? This is the law’s most controversial part. The justices must decide whether the Constitution gives Congress the right to require virtually all Americans to buy a product — health insurance — or pay a tax penalty. This provision is key for health care companies because younger, healthier individuals would be forced to buy insurance instead of waiting until they get sick. That would offset the higher costs of insuring people with preexisting conditions.

3. Does “severability” kill the entire ACA? If the Supreme Court kills the individual mandate, it must decide whether all of the law’s other provisions can live without it. This is the biggest risk for insurers and managed care companies. If the individual mandate dies, but they still must cover individuals with preexisting conditions without charging higher premiums based on medical history, it creates an untenable situation for those payers.

4. Can Congress force states to comply with Obamacare? The ACA requires states to expand Medicaid coverage to everyone under 65 with incomes at or below 133% of the poverty level. If they don’t, they’ll lose all their federal Medicaid money. Since Medicaid accounts for 40% of the funding states receive from the federal government, some claim the ACA is “coercive,” and therefore unconstitutional. Hospitals, which are struggling with uncompensated care from uninsured patients, are counting on this Medicaid expansion to lighten their load.

Although myriad political and social issues are stitched into ACA’s crazy quilt, our focus here is to break down the impact different scenarios will have on investors. Remember: For any of these last three questions, the Supreme Court must first rule that it can remove certain parts of Obamacare without killing its other provisions.

So, here are five possible ways this landmark decision could play out, ranked from the mildest to most serious investing impact — and the likely winners and losers in each case:

1. Upholding the ACA in Its Entirety

It seems counterintuitive that the Supreme Court’s blessing would have the mildest impact, but it’s true. That’s because most of the fear and loathing already has been priced into health care stocks over the past 18 months.
Investor impact: Minor.

Winners:
Health insurers and managed care providers: UnitedHealth Group (NYSE:UNH), Humana (NYSE:HUM), Cigna (NYSE:CI), Aetna (NYSE: AET) and WellPoint (NYSE:WLP) would vie for up to 30 million new customers.

Big Pharma: Prescription drug sales should rise with all those new patients — a boon for companies losing patent protection on lots of big-name drugs. Look at Merck (NYSE:MRK), GlaxoSmithKline (NYSE:GSK), Pfizer (NYSE:PFE), Johnson & Johnson (NYSE:JNJ) and AstraZeneca (NYSE:AZN).

Health information companies: By creating health exchanges and requiring a migration to electronic health records (EHRs), the law boosts info-tech companies that help payers and providers get their systems up to scratch. Keep an eye on Cerner (NASDAQ:CERN), McKesson (NYSE:MCK) and Quality Systems (NASDAQ:QSII).

Losers:
Medical devices: The ACA’s 2.3% excise tax on medical devices ranging from artificial knees and pacemakers to surgical gloves and imaging technology is slated to take effect next year — a tough break for companies like Medtronic (NYSE: MDT), St. Jude Medical (NYSE:STJ), Covidien (NYSE:COV) and Boston Scientifics (NYSE:BSX). Although JNJ also is a mega-manufacturer of medical devices, its pain would be offset somewhat by its pharmaceutical gains.

Home health care: Providers like Lincare Holdings (NASDAQ:LNCR), Gentiva Health Services (NASDAQ:GTIV), Amedisys (NASDAQ:AMED) and Almost Family (NASDAQ:AFAM) would still face $40 billion in Medicare reimbursement cuts over the next decade.

2. Striking Down the Entire Law

Killing the law basically returns the industry to the status quo, for now. Lawmakers will be pressured to replace the ACA with something, however, so health care entities that get a reprieve must stay on their toes.
Investor impact: Minor.

Winners:
Insurers and managed care companies. Repealing the law means no universal health coverage or pricing requirements. And last week’s announcements by Humana, UnitedHealth and Aetna to voluntarily cover children on their parents’ policy until they turn 26  and end most retroactive cancellations, lifetime limits and co-pays for some preventative care will buy great PR for insurers that don’t want “repeal” to turn into “replace.”

Home health care and medical devices: Repeal would be good for the reasons listed above.

Losers:
Hospitals: Rising levels of uncompensated care and no tort reform to restrain the high cost of malpractice suits will keep hospitals in a fix without the ACA. Closely monitor the blood pressure of HCA Holdings (NYSE:HCA), Health Management Associates (NYSE:HMA), LifePoint Hospitals (NASDAQ:LPNT), AMN Healthcare (NYSE:AHS), Universal Health Services (NYSE:UHS) and Tenet Healthcare (NYSE:THC).

3. Striking Down the Medicaid Expansion

States will be relieved if this contentious and expensive “unfunded mandate” is struck down, but it will create no other big winners.
Investor impact: Severe for certain stocks.

Losers:
Nursing homes. Since they rely on Medicaid as well as Medicare, stocks like Sun Healthcare (NASDAQ:SUNH), Skilled Healthcare (NYSE:SKH) and Kindred Healthcare (NYSE:KND) would be hard-pressed to serve a graying population with fewer government resources.

Other Medicaid-focused stocks. Managed care companies with a large Medicaid patient base like Molina Healthcare (NYSE:MOH), Centene (NYSE:CNC) and Amerigroup (NYSE:AGP) also could be worse off if this coverage is stricken.

4. Striking Down Only the Individual Mandate

This is an untenable situation for the industry — and one in which most health care stocks lose big. Payers and providers would be forced to bear all the costs of reform without being able to balance the added risk with healthier, younger enrollees. Hospitals would still deal with the problem of uncompensated care. Nursing homes and Medicaid HMOs would still have to deal with declining reimbursement rates. Medical device manufacturers still pay the 2.3% annual sales tax. And that $80 billion in reimbursement rates Big Pharma dealt away in exchange for higher drug sales is gone forever.
Investor impact: Catastrophic.

Winners:
Info-tech companies.
Health care information systems and EHR stocks like those named above win because updating technology and infrastructure is a needed efficiency throughout the sector and will happen no matter what.

Losers:
Just about everybody else: health care stocks as well as diversified mutual funds and exchange traded funds (ETFs) like Fidelity Select Health Care Portfolio (MUTF:FSPHX) or SPDR Health Care Select Sector ETF (NYSE:XLV) that have broad exposure to large-cap names most affected by the law.

5. Ruling That the Anti-Injunction Act Applies to This Case

The only thing worse for health care stocks than No. 4 above is for the Supreme Court to essentially rule that it can’t rule until 2014 or 2015. If that happens, dive for cover because this entire industry could be in turmoil for the next two years.
Investor impact: Catastrophic.

Bottom Line: When it comes to predicting how these six men and three women ultimately will rule, Vegas oddsmakers are as likely to pick the outcome as Inside-the-Beltway pundits.

But here are three hunches:
1. The justices wouldn’t have taken this case if they intended punt it into 2014, so scratch scenario #5.
2. They understand the catastrophic impact to the health care industry if they keep everything but the individual mandate, so nix #4.
3. The Medicaid expansion could be in trouble if the justices agree with the states that it’s an unfunded mandate.

My Bet: The ACA will be struck down 5-4, with Anthony Kennedy providing the swing vote and Sonia Sotomayor writing the dissent, giving the health care market and federal regulators another shot at building a better scheme the second time around.

Although I feel pretty good about my guess — don’t take it court.

As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.


Article printed from InvestorPlace Media, http://investorplace.com/2012/06/the-obamacare-ruling-5-investing-scenarios/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.