by Susan J. Aluise | October 22, 2012 10:52 am
With the presidential race in a dead heat less than three weeks from Election Day, it’s a good time to break down the prognosis for healthcare stocks depending on whether President Barack Obama or Mitt Romney emerges victorious on Nov. 6.
Although the U.S. Supreme Court upheld the lion’s share of Obama’s Affordable Care Act (ACA) in June, Romney has vowed to repeal the landmark healthcare reform law on his “first day in office” if he’s elected. He would first issue an Executive Order granting Obamacare waivers to all 50 states, then work with Congress to “repeal and replace” the law.
If Obama is reelected, the battle for the future of healthcare once again will be waged between the opposite ends of Pennsylvania Avenue, with congressional Republicans likely to add a new refrain to the “repeal and replace” tune: delay. Since the Department of Health & Human Services has so far provided limited guidance to states about health insurance exchanges, ACA opponents will try to push back the law’s 2014 implementation date, as Politico explains.
Obamacare foes seem sure to keep enough friends in the House to advance a “repeal, replace or delay” agenda. As of this writing, 199 GOP seats can be considered safe, and another 25 either are likely or leaning Republican, for a total of 224, according to Roll Call’s latest projections. Republicans only need 218 seats to hold on to the House.
But if Republicans are to repeal, replace or delay Obamacare, they’ll need a lot more help in the U.S. Senate, which today has 47 Republicans, 51 Democrats and two Independents, who typically caucus with the Democrats. Sixty-seven U.S. Senators (37 Republicans and 30 Democrats) aren’t on the ballot this year.
Of the 33 Senate seats up for grabs, six are safe or likely Republican, 16 are safe, likely or leaning Democrat, and two are safe or leaning Independent. If conventional wisdom and current polls bear out, that adds up to a total of 46 Democrats, two Independents who caucus with them and 43 Republicans.
That means control of the U.S. Senate — and the fate of any GOP plan to derail Obamacare — hinges on nine races that still too close to call: Massachusetts, Virginia, Wisconsin, Connecticut, Arizona, Indiana, Montana, Nevada and North Dakota.
Obviously, simple math can’t account for all the complex nuances of the presidential race, let alone the impact of state and local elections for the U.S. Senate and the House. That said, let’s break down healthcare sector winners and losers in two potential election scenarios:
Republicans would need to take seven of the nine tossup races (Vice President Paul Ryan would be the tie-breaker) to win the Senate. That’s extremely unlikely, considering the GOP is at risk of losing the Indiana Senate seat Richard Lugar won with more than 87% of the vote in 2006. (Lugar lost his primary battle to Tea Party pick Richard Mourdock).
Still, if everything goes Romney’s way, the GOP would gain control of the White House and both chambers of Congress.
Stocks that will benefit:
Big Pharma’s big tax burden under Obamacare likely will be delayed and/or whittled down significantly. Drug manufacturers also are likely will benefit from Romney’s pledge to rein in the Food & Drug Administration (FDA), which he believes stifles innovation. That strengthens stocks like Pfizer (NYSE:PFE), Eli Lilly (NYSE:LLY), Merck (NYSE:MRK), Abbott Laboratories (NYSE:ABT) and AstraZeneca (NYSE:AZN) because it’ll become easier for them to gain new drug approvals.
Medical device companies could win a reprieve from the ACA’s 2.3% excise tax on everything from artificial knees and pacemakers to surgical gloves and imaging devices, scheduled to hit in 2013. That would be good news for Medtronic (NYSE:MDT), St. Jude Medical (NYSE:STJ), Covidien (NYSE:COV), Johnson & Johnson (NYSE:JNJ) and Boston Scientifics (NYSE:BSX).
Insurance companies like UnitedHealth Group (NYSE:UNH), Cigna (NYSE:CI), Aetna (NYSE: AET) and WellPoint (NYSE:WLP) should also win because taxes will be lower. If Romney’s post-repeal “replacement” still requires consumers to purchase health insurance (as he proposes) that’s another win. Romney also favors allowing carriers to compete for business across state lines.
Stocks that will suffer:
If Romney grants ACA waivers to all 50 states and allows them to use Medicaid funds at their discretion, hospital stocks will be stressed. That’s particularly true for Medicaid-reliant companies like Molina Healthcare (NYSE:MOH), Centene (NYSE:CNC) and Amerigroup (NYSE:AGP).
Romney’s tort reform proposals, which limit malpractice awards, eventually could relieve pressure for hospitals. But in the near term, chains like HCA Holdings (NYSE:HCA), Health Management Associates (NYSE:HMA), LifePoint Hospitals (NYSE:LPNT), Universal Health Services (NYSE:UHS) and Tenet Healthcare (NYSE:TNT) could face near-term headwinds, too.
In Obama’s best-case scenario, he wins, and the Democrats hold Wisconsin, Virginia, Montana, North Dakota, and retiring Independent Sen. Joe Lieberman’s Connecticut seat, while picking up low-hanging fruit in Massachusetts and Nevada. That makes a total of 50 votes with Vice President Joe Biden as the tie-breaker.
Some stocks would be better buys under this scenario, although most of the impact of Obamacare has been priced in already.
Stocks that will benefit:
Health information companies could be breakout performers if there’s no delay in implementing the state exchanges under Obamacare. States, providers and payers will be scrambling not only to invest in new healthcare IT — particularly cloud-based services — but they’ll also need expert professional services to ensure that the data transmission is interoperable and secure. Cerner (NASDAQ:CERN), McKesson (NYSE:MCK) and Quality Systems (NASDAQ:QSII) are very good bets in this scenario.
Hospitals like those mentioned above will fare better overall because the universal mandate gives them the ability to stem the cost of uncompensated care. They also could benefit if congressional Republicans make a strong push for tort reform.
Insurers seem to benefit either way — with lower taxes and interstate competition under Romney or 30 million potential new customers under Obama.
Stocks that will suffer:
Nursing homes and home health providers like Lincare Holdings (NASDAQ:LNCR), Gentiva Health Services (NASDAQ:GTIV), Amedisys (NASDAQ:AMED) and Almost Family (NASDAQ:AFAM) still face $40 billion in Medicare reimbursement cuts over the next decade. They’ll also likely take some sort of hit from the ACA’s projected $716 billion in Medicare cuts over the next decade, since the cuts certainly won’t be limited to waste and fraud. Expect facilities with heavy exposure to this sector to experience headwinds.
Since the Supreme Court also struck down the Medicaid expansion, stocks like Sun Healthcare (NASDAQ:SUNH), Skilled Healthcare (NYSE:SKH) and Kindred Healthcare (NYSE:KND) — could face the double whammy of Medicare and Medicaid cuts.
Device manufacturers (and tanning salons) still face that onerous excise tax under Obamacare, but the downside largely has been priced in.
As of this writing, Susan Aluise didn’t own any securities mentioned here.
The opinions contained in this column are solely those of the writer.
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