By Jon Kamp
Health stocks face a bumpy ride next week as the Supreme Court hosts arguments on the 2-year-old U.S. health-care overhaul law, leaving investors to try to divine which way the justices are leaning.
An actual ruling isn't expected until June, and even then the November election looms as another potential turning point for the health law. Still, with business prospects for hospitals, insurers and other health firms hanging in the balance, the court debate will garner plenty of attention.
"We believe the hearings will provide a meaningful indication of where the justices stand," Wedbush Securities analyst Sarah James said.
Beginning Monday, the court will hear arguments in a case brought by opponents of the 2010 health-care law. A central issue is the constitutional challenge to the requirement most Americans carry insurance or pay a fee. Other issues include whether the law can survive without this requirement and whether a planned expansion of Medicaid, the health program for the poor, is constitutional.
Analyst James projected the court will uphold the law, a view also shared by some other health analysts. Although, as BMO Capital Markets analyst Dave Shove wrote, the outcome is "hazy at best."
Health stocks have underperformed the broader market this year amid the uncertainty. The NYSE Healthcare Index is up just 3.6% in that span compared with a nearly 11% gain in the S&P 500 index.
A Supreme Court ruling could relieve some pressure. Goldman Sachs analyst Matthew Borsch anticipates a "neutral-to-positive" reaction from most health stocks if the law is indeed upheld. While investors might be glad to see some provisions disappear, they also may be concerned about seeing faster-emerging and stronger cost-containment measures as an alternative, he noted.
Hospital stocks could climb the most if the law remains intact, analysts said. If more people carry insurance, it should reduce the impact hospitals currently feel from nonpaying customers. Big publicly traded hospitals include HCA Holdings Inc. (>> HCA Holdings Inc) and Tenet Healthcare Corp. (>> Tenet Healthcare Corporation).
The key issue for Medicaid-focused insurers such as Molina Healthcare Inc. (>> Molina Healthcare, Inc.) and Centene Corp. (>> Centene Corp) is similarly basic: They stand to benefit from the law's plan to expand Medicaid coverage, so stocks could come under pressure if that expansion goes away.
Medicaid-focused insurers have performed better than most health stocks lately, with Centene shares up 12% on the year and Molina up 46%, in part because they are seen as better positioned to capture the people gaining health insurance. Analysts have called the Medicaid expansion question a "'sleeper' issue because of the close scrutiny on the insurance mandate.
The law aims to add 17 million people to the health program for the poor over the next decade. But plaintiffs in the Supreme Court case, including governments and attorneys general from several states, argue the federal government is forcing states to take on expensive new responsibilities they can't afford.
The states and federal government jointly fund Medicaid; under the law, the federal government will cover program expansion costs for the first three years, and at least 90% after that.
Whether the insurance-buying mandate is upheld, and whether the court rules the rest of the law can stand without it, will be key for big managed-care firms such as WellPoint Inc. (WLP), UnitedHealth Group Inc. (>> UnitedHealth Group Inc.) and Aetna Inc. (>> Aetna Inc.).
Goldman Sach's Borsch believes managed-care stocks could trade up if the court strikes down the individual mandate, but only if the court also nixes requirements that health insurers take on customers no matter their health status. Health insurers have argued taking away just the mandate would jack up insurance premiums by letting healthy people wait to buy insurance only when they need it.
Despite all the attention, BMO's Shove thinks investors are overemphasizing the impact of the pending court ruling, and that insurers can weather the storm. Marshall Gordon, a director and health-care analyst for Legg Mason Inc.'s (LM) ClearBridge Advisors, also feels the case is getting undo attention.
But that doesn't mean investors won't be working hard to read the tea leaves next week. "There's definitely going to be noise," Gordon said.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; [email protected]