investing

What the Supreme Court's Ruling Means for Health Care Stocks

Hospitals and health companies skilled at cost containment will reap the biggest rewards from the Affordable Care Act.

The complexity of the nation’s fledgling health care law was strikingly evident in the stock market’s reaction to the Supreme Court’s ruling on the Affordable Care Act.

The Supreme Court’s decision on June 28 to uphold a key element of the law -- the individual mandate to buy health insurance -- means that a cascade of other provisions will likely proceed. Those provisions will touch nearly every part of the health care industry, in widely disparate ways.

The high court also barred the federal government from pulling all support from states that refuse to implement the vast changes in Medicaid eligibility called for in the law. Uncle Sam will be able to impose some penalties on states that don’t follow the new requirements, but the draconian measures that were threatened have been softened, leaving in question the law’s impact on an array of companies that provide services for Medicare and Medicaid recipients.

Stock prices fluctuated in nervous accordance with investor perceptions of how the new health care regime will affect different subsectors. Hospital stocks rose, for example, while shares of drug and managed-care companies went on a roller-coaster ride as investors tried to weigh whether the impact would ultimately be negative or positive. Likewise, the impact on a spectrum of related health firms was mixed, as analysts scrambled to assess whether the negative -- new taxes and curbs on pricing -- would outweigh the positive -- having a greater segment of the population insured.

Analysts say the impact of the law is likely to be positive overall, with hospitals and companies skilled at cost-containment reaping the biggest rewards. Even companies that could be hurt by limitations on what they can charge are likely to benefit from having more people insured.

To understand the stock market’s reaction, it’s important to have a basic understanding of what will happen under the law. Starting in 2014, the law will:

• Require health insurers to take all comers and bar them from denying coverage to those with preexisting conditions.

• Demand that all individuals buy health coverage or else be subject to a tax penalty, which cannot exceed 2.5% of an individual’s income.

• Require employers with 50 or more workers to provide comprehensive health coverage to their workers or face penalties (small businesses with fewer than 50 employees will not be required to offer health coverage, but some will be given federal tax breaks if they do).

• Set up a series of subsidies for lower-income individuals to help them afford health coverage.

• Establish online insurance “exchanges” at which consumers can shop for and compare the health insurance policies available in their state.

• Require insurers to justify rate hikes and refund a portion of consumer premiums if insurers pay out less than 80% to 85% of premiums for clients’ health expenses.

• Impose a 2.3% excise tax on the sale of a wide array of medical equipment and supplies, a provision expected to bring in $33 billion over ten years.

• Impose new taxes on high-income filers. Singles earning more than $200,000 a year and married couples with more than $250,000 in joint income will pay additional Medicare premiums and 3.8 percentage points more in capital gains taxes.

Hospital companies were the one clear winner, because they suffer under the current system by having to shoulder the cost of visits to emergency rooms by uninsured patients. With the promise that far fewer Americans will go uninsured under the new law, shares in hospital operators soared on June 28. However, an analysis by PricewaterhouseCooper’s PwC Health Research Institute says that suburban hospitals and those with an average payer mix -- as opposed to a population heavily subsidized by the government -- will do better than medical centers and hospitals in low-income areas that treat a large number of Medicare and Medicaid patients.

HCA Holdings Inc. (symbol HCA), which operates 163 hospitals, jumped nearly 11%, to $29.47. Health Management Associates (HMA), which operates hospitals in suburban areas (mainly in the South), popped 8.9% to close at $7.49.

But few companies operate nothing but hospitals. An increasing number of health care providers have diverse operations that span both hospitals and managed care. These companies saw a more muted impact on their share prices because of the complexity of evaluating the pluses and minuses of the part of the law that could force many firms to pay back a portion of consumer premiums if the firms spend too little on medical services for their members. In addition, these companies may have to spend significant sums to prepare for new government and reporting requirements.

Tenet Healthcare (THC), which both operates hospitals and hosts a managed-care network, advanced 5%, to $5.25. Community Health Systems (CYH), which operates 131 hospitals as well as dozens of rehab and psychiatric-care facilities, rose 8%, to $27.54. But Vanguard Health Systems (VHS), which runs 26 hospitals and three managed-care health networks, edged up only 0.7%, to $8.30.

Insurers Aetna (AET) and Cigna (CI) slumped, as did managed health care companies Coventry Health Care (CVH) and WellPoint (WLP). Aetna dropped 2.7%, to $39.85; Cigna fell by the same percentage, to $44.18. WellPoint slid 5.2%, to $65.90, while Coventry retreated 2.3%, to $32.46.

However, UnitedHealth Group (UNH) edged up 0.5%, to $59.60, while Humana (HUM) was up a mere 2 cents, to $79.56. But WellCare Health Plans (WCG), which specializes in providing health care through Medicaid-sponsored plans, soared nearly 9%, to $53.98.

Pharmaceutical companies will experience the least operational disruption from the law, according to PwC’s analysis. But even here, the law has a push and pull. Makers of brand-name prescription drugs stand to lose some $155 billion in revenue over the next decade because of new Medicare discounts for retirees, Medicaid rebates and new fees. But those losses are at least partially offset by Medicaid expansion, which will cover more consumers and help the drug companies boost sales. Shares of Abbott Laboratories (ABT) were essentially flat, rising 4 cents, to close at $62.91; Eli Lilly (LLY) rose 0.4%, to $42.10; Merck (MRK) also moved forward by 0.4%, to $40.68; and Johnson & Johnson (JNJ) edged up a dime, to $66.94. But Pfizer (PFE) fell 0.4%, to $22.53.

The biggest gainer of the day was HMS Holdings (HMSY), a New York City-based business-services company that specializes in health care cost containment. HMS soared 14%, to $31.75.

Cost containment will remain a key theme for the industry as prices for medical services become increasingly transparent, thanks to rules that demand additional reporting on medical outcomes and costs. But the turmoil in the health care industry is far from over, according to PwC, which predicts both consolidation and an influx of new players that will continue to threaten the status quo.

Kathy Kristof is a contributing editor to Kiplinger’s Personal Finance and author of the book Investing 101. Follow her on Twitter. Or email her at practicalinvesting@kiplinger.com.

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