Sharp moves in a number of health-care stocks suggest that markets are as surprised as many political observers by the U.S. Supreme Court’s ruling in favour of Obamacare.
Yet while analysts suggested that the decision Thursday removes a great deal of uncertainty from the U.S. health-care industry, the presidential election this fall looms as an additional risk for investors tempted by the sector.
Shares of hospital companies were the biggest gainers from the court’s ruling that it is constitutional for the government to require all Americans to carry health insurance. The new law will create millions more insured patients for hospitals to serve.
HCA Holdings Inc., the nation’s biggest hospital company, advanced more than 9 per cent, and smaller firms like Community Health Systems Inc. and Tenet Healthcare Corp. gained in the mid-to-high single digits.
Gary Taylor of CitiGroup Global Markets Inc., who upgraded hospital stocks earlier this month, says the court’s affirmation of the law will increase hospital earnings 45 per cent by 2015 if new state-based insurance exchanges pay commercial rates.
He thinks hospital stocks could double in 12 months if President Barack Obama is re-elected.
However, Mr. Taylor says, “the presidential election still matters as much as the court decision.” If Mitt Romney, the Republican candidate, defeats Mr. Obama, federal funding for expansion of insurance coverage would likely be withheld, and “hospital stocks would erase all their gains from a favourable Court decision and head towards trough valuations by [January] 2013.”
The research team at Jefferies & Co. cautioned that a hospital-stock rally could be “relatively short-lived” as investors shift their focus to Washington’s attempt to reduce its deficit .
Insurance companies with heavy exposure to Medicaid, a system of health insurance for those requiring financial assistance, also won Thursday. Wellcare Health Plans Inc. and Molina Healthcare Inc. closed up more than 8 per cent. The court decision means that Medicaid will expand significantly with roughly 16 million newly insured people by 2014.
Larger insurers with more private-sector business, however, saw their shares fall. WellPoint fell 5 per cent, with Aetna Inc. and Cigna Corp. down between 2 per cent and 3 per cent.
Analyst Sheryl Skolnick at CRT Capital Group noted investors should “temper [their] enthusiasm” over the Supreme Court decision, as Republican efforts to cut Medicare – health insurance for those over 65 – offers a headwind. Still, she said, “how can one be enthusiastic about hospitals and negative on the health plans?” in the wake of the decision. “Those companies just got handed 30 million new members on a silver platter, members they have worked hard to disenfranchise in the past and wouldn't get back without government help,” she wrote in a client note.
The Jefferies research team advised buying diversified insurers, also known as managed-care organizations, if they fall further.
“We would have expected the [diversified insurers] to trade higher [Thursday],” they said. They’ve had to absorb the impact of mandated reductions in administrative costs, “so the 2014 volume upside from the mandate and Medicaid expansion are positives.”
Wall Street expectations for the Supreme Court decision changed sharply after oral arguments this spring, during which a number of justices appeared hostile to the law. Analyst Ana Gupte of Bernstein Research said she had assessed the probability of the law being upheld at 80 per cent until the arguments, when she cut it to 15 per cent.