With the Supreme Court ruling on President Barack Obama's healthcare reform law just three weeks away, investors in healthcare stocks need to be prepared.
While some are confident the Supreme Court will rule in favor of the Patient Protection and Affordable Care Act, a rejection of the law — or at least of the mandate requiring everyone to buy insurance — may be more likely.
If so, Obamacare could be toast.
Based on tough questioning from moderate Justice Anthony Kennedy in Supreme Court hearings in March, the odds of that happening are rising. In close cases, Kennedy is often the swing vote.
At InTrade – where people can bet on the outcome of real world events -the probability of Obamacare being overturned has risen to about 70%.
So what would happen to healthcare stocks if Obamacare was overturned?
Surprisingly, it is less than you'd think.
In fact, most healthcare stocks will benefit simply by having a definitive answer on the fate of the law. A decision would lift the uncertainty hanging over the sector since Obamacare passed in 2009.
"Coming off the market lows of 2009, you saw multiple expansion in virtually every sector of the S&P 500, but very little in health care," Eddie Yoon, Fidelity Investment's top health-care analyst, told Barron's.
Still, some healthcare stocks would gain more than others if Obamacare gets torpedoed. And a few could get a little dinged.
Losing Healthcare Stocks
Healthcare stocks that were counting on a bunch of new customers from the Medicaid program are most at risk. Obamacare would add between 16 million and 20 million more Americans to Medicaid.
Hospital chains would also get stung. The mandate that everyone carry insurance would wipe out losses they incur from treating uninsured patients. Hospital chain stocks include Tenet Healthcare Corp. (NYSE: THC), HCA Holdings, Inc. (NYSE: HCA) and Vanguard Health Systems (NYSE: VHS).
Still, how much these two sectors would get hurt by the demise of Obamacare is hard to say. The markets started pricing in the effect of a reversal when the legal challenges began.
"In the investment community there's a discounted value of that future revenue stream in the share prices today, and that discounted value goes away … if health reform is overturned," Chris Rigg, senior health care analyst at Susquehanna Financial Group, told The Street.
Winning Healthcare Stocks
The healthcare stock sector that stands to gain the most if Obamacare is overturned includes the bigger, more diversified insurance companies like Aetna Inc. (NYSE: AET), Cigna Corp. (NYSE: CI) and Coventry Health Care (NYSE: CVH).
These managed-care companies would escape burdensome regulations due to go into effect in 2014 and 2015. They also would no longer be bound to provide coverage to anyone that asks.
In addition, several managed-care companies have chosen to adopt some of Obamacare's most popular provisions regardless of what the Supreme Court does.
Aetna, UnitedHealth Group (NYSE: UNH) and Humana Inc. (NYSE: HUM) all said they would continue to cover preventive care without a co-payment and will continue to allow adult children up to age 26 to remain on a parent's plan.
That move should help insulate those companies from the turmoil that would follow a reversal of the Affordable Care Act.
Immune to Obamacare's Fate
Investors looking to hedge on the Supreme Court ruling have several healthcare stock choices.
"If the mandate is shot down or the whole bill is shot down, I think there's very little impact to the companies' fundamentals and the stocks," Barbara Ryan, senior pharmaceutical analyst for Deutsche Bank, told CNBC.
Ryan pointed out that deals the pharmaceutical companies made to provide discounts for government programs like Medicare and Medicaid would be too much trouble to change no matter what becomes of Obamacare.
She said that restructuring, improved cash flows, and a revived new product flow give the sector a relatively strong outlook. In particular Ryan likes Merck, Bristol Meyers Squibb Co. (NYSE: BMY) and Abbott Laboratories (NYSE: ABT).
Also destined to thrive regardless of the fate of Obamacare are Electronic Medical Record (EMR) companies.
Ironically, Obamacare is what made EMR stocks attractive. Specifically, the Affordable Care Act requires the medical industry to give up its paper for digital documents. Now that the transition has begun, it's not going to stop.
Related Articles and News:
- Money Morning:
With or Without "Obamacare" These Healthcare Stocks Are Headed Higher
- Money Morning:
Obamacare in the Balance: Key Takeaways from the Affordable Health Care Act Hearings
- Money Morning:
Health Care Reform: How the Supreme Court's Affordable Care Act Ruling Could Affect Our Economy
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- CBS News:
UnitedHealth, Humana, Aetna pledge to keep parts of Obama's health care law, regardless of Supreme Court