Obamacare ruling: Tricky investing terrain

The Supreme Court decision could benefit some health stocks.

By The Fiscal Times Jun 29, 2012 1:11PM
Image: Insurance (© Hemera/age fotostock)By The Fiscal TimesSuzanne McGee

Thursday's 5-4 Supreme Court ruling upholding virtually all the provisions of President Barack Obama's controversial health care reform legislation was a big victory for the White House, and it could be a win for some health care stocks.

Shares of hospital companies like HCA Holdings (HCA) soared on the news. Now, finally, with all Americans required to obtain health insurance, there's a chance for hospitals to be paid for all the services they provide. Those uninsured patients who now turn to emergency rooms to provide treatment for what otherwise might be handled by a family physician may no longer be as much of a drain on the bottom line, and patients who defer treatment until an illness becomes critical for lack of insurance -- and who then can't pay their hospital bills -- may decline.

On the flip side are the insurance companies. The new law -- assuming that it isn't repealed after the November elections by a new Republican administration or Congress -- will require them to accept new customers regardless of their health history, and not levy extra charges or deny coverage based on pre-existing conditions. The theory is that enough healthy younger people will now need to buy insurance to comply with the law that their premiums will help offset the additional costs associated with insuring, say, more people with multiple sclerosis or epilepsy. But for now, that's just a theory, so the market's response -- dumping stocks in health insurers like WellPoint (WLP) -- is eminently rational.

That said, the ruling might have been the best possible outcome for insurers in the long term. After all, they will still be getting an estimated 30 million new policyholders and won't have to worry about covering the sick while healthy people, who are less costly to insure, opted to not buy coverage -- a scenario that might have happened if the court had struck down the mandate. Before the ruling, Morningstar analyst Matthew Coffina had written that "the most favorable outcome for managed care organizations at this point would be for the entire law to be upheld." That's essentially what happened Thursday.

But the disparate market responses in two very different parts of what is lumped together as "the health care sector" should remind us that there can be as great a difference between two companies in this group as exists between, say, a credit union in a medium-sized city in the Midwest and JPMorgan Chase (JPM), both of which are part of the financial services sector.

Indeed, in the health care arena, the differences actually can be much larger: Companies in this group can be bleeding-edge biotech firms that may never generate profits, or venerable pharmaceutical giants offering solid streams of dividends; they can provide insurance or develop medical devices. They can operate nursing homes, hospitals or plastic surgery clinics. What divides them -- their business models, the factors that contribute to their bottom line -- can be far more important to investors than what they have in common.

The decision might add some clarity to the health care picture, but not much. It still leaves plenty of questions unanswered. And given that the legislation won't take full effect until 2014, it leaves lots of time for legislators to act if, for example, Mitt Romney wins in November and Republicans gain control of the Senate. Ultimately, it may still be tricky for investors to find the best bets in the group.

Certainly, broad sector exchange-traded funds seem to make little sense; Friday, for instance, at one point HCA's stock was up 8%, WellPoint's was down 6.3% and the NYSE Healthcare Index was down around 1%.

That means investors are going to have to devote more thought to how they play this sector --and to look for companies that are doing a good job of developing the kinds of new drugs, therapies, devices and other services that the market will value. A new drug reduces the need for surgery; a new device that makes surgery less invasive and less costly; a new post-surgical treatment that makes post-surgical recovery times shorter -- all of these will be of tremendous value in the new healthcare universe that the healthcare legislation has created. Or investors can just look for mutual fund managers that have a proven ability to navigate around all the political rhetoric and identify companies likely to do well regardless of what happens to the legislation in the coming years.

Finding those companies is not a simple process, of course. Take the drug companies as one example: In theory, the law will mean that more Americans are able to afford the drugs they need because they will be insured. On the other hand, however, insurers will be putting more pressure on drug companies with respect to pricing. That's one reason big pharma stocks are largely lower today in reaction to the verdict. There's a similar scenario in the medical device arena; again, demand may surge while pressure to contain costs also rises. (The complicating factor here is that the law requires these companies to pay a tax on their domestic sales beginning in 2013.)

We don't know how and when these various costs and benefits will hit companies, and how it will play out. Will some of the pharmaceutical companies be better able to deliver lower-cost versions of drugs? Will one device company leap so far ahead of its rivals in technological terms that insurers will have little ability to push back on pricing?

Thursday's market reaction was largely a knee-jerk one: The Supreme Court ruling was a major event for the industry, one that was widely telegraphed in advance and thus one that traders were bound to react to. From here on, however, investing in health care stocks is going to become more complicated and require more research and analysis. Hospitals will do well -- but which hospitals are likely to do best? Insurers still face big challenges -- but which one of them will roll out a dramatically successful advertising campaign and thus attract legions of younger, healthy Americans as clients?

As the market response already shows, the only certainty is that the various segments of the health care sectors will continue to show relatively little correlation. Now investors will have to find ways to track the individual stocks within those sub-sectors, in search of the companies that show the greatest ability to profit from tailwinds or fight the obstacles that have been thrown into their path.

But then, no one said investing was easy.

Suzanne McGee is a columnist at The Fiscal Times. Subscribe to The Fiscal Times' FREE newsletter.

More from The Fiscal Times

Jun 30, 2012 4:59PM
I would like to know what the 43% TAX ON ALL DIVIDENDS that was tucked in that bill mean to investing.  Basically I just lost 1/2 my income to a government that can't do anything but accumulate debt.  So great, what does that mean for the market, and all those companies that pay dividends?  I'm seriously looking at relocating to a different country, lock, stock and cash.  Oh an don't forget the increase in Medicare deduction of .9% so more money out of my pocket.  How's that "change" working for you now, fools?
Jul 2, 2012 12:35PM
health care is a stock market.....?.......we live in the gutter people...and we cant even see it......God bless you all.
Jul 1, 2012 1:53PM
Sonorankat, if that tax would apply to half your income, then you are making at least $480,000. That puts you in the top one percent.  I say go, leave, get the hell out, you greedy bastard.  How damn much do you want? 
Jul 1, 2012 10:40AM
When you spend over 3 trillion dollars for two wars, you will never get out of debt.
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