Supreme Court Decision Looms; How to Trade the Obamacare Ruling
Next week, the Supreme Court is expected to make its final ruling on the constitutionality of the Patient Protection and Affordable Care Act, more commonly known as Obamacare.
The legislation was the defining accomplishment of the President's first-term, but has been bitterly criticized by political opponents. Needless to say, the stakes are high.
As of Friday, bettors at intrade.com, a site which allows users to speculate on the outcome of world events, were projecting a 75% chance that the Supreme Court overturns the individual mandate by the end of the year.
It is possible that some parts of the legislation will be overturned while others are not. In close cases heard by the Court, Justice Anthony Kennedy is often the swing vote with the other Justices frequently voting along conservative/liberal ideological lines. Over three days in late March, the Supreme Court held the longest oral arguments in 45 years as both sides presented their cases. The Court could endorse Obamacare in its entirety, throw out just the individual mandate, overturn the entire law or come to some other split decision.
Some observers have pointed to tough questioning from Justice Kennedy as an indication that all or part of Obamacare could be struck down. The consensus opinion, however, is that little could be gleaned about which way the decision will go from the oral arguments. CNBC's Jim Cramer, a Harvard law grad, said that the Supreme Court is a "black box," and that "I couldn't predict a thing from those inquiries."
Given the uncertainty of the landmark decision, healthcare investors will likely be relieved once this overhang has been removed. As a result, next week's decision might be a positive catalyst for healthcare stocks no matter what the outcome. If there is one thing that markets and investors do not like, it is uncertainty. After the Supreme Court ruling, the entire healthcare landscape should become much clearer from an investing perspective.
Generally speaking, stocks should benefit if parts or all of the Act are overturned. Cramer has previously stated that, "if Obamacare goes down, you can raise almost every company's estimates for 2013 - if it is approved I am slashing my numbers." Given different potential outcomes, however, there will be winners and losers in the sector. Traders who do their homework should be able to find some opportunities next week.
If Obamacare is ruled unconstitutional, it could have an adverse effect on companies that would get a large influx of new customers through Medicaid as a result of the legislation. Estimates indicate that the law would add between 16 million and 20 million Americans to Medicaid. Major Medicaid HMO stocks such as Centene (NYSE: CNC), Amerigroup (NYSE: AGP), and Molina Healthcare (NYSE: MOH) could be negatively impacted if the Supreme Court strikes down Obamacare.
On June 11, Centene cut its full-year guidance and has fallen 31% over the last three months. It is important to remember, however, that the market has had ample time to price in the risks of the Supreme Court decision into these stocks and some of the downside is likely already reflected in the share prices. Over the last 3 months, Amerigroup has fallen 1.50% while Molina has cratered 31%.
In May, hedge fund heavyweight Larry Robbins of Glenview Capital Management told CNBC that the Patient Protection and Affordable Care Act would be good for hospital stocks. The thinking behind his statement was that hospitals would have far fewer losses from treating the uninsured since the legislation mandates that everyone buy healthcare insurance or pay a penalty. If the individual mandate is overturned, however, hospitals will be forced to continue to treat the uninsured - frequently at a steep loss.
Among the hospital chain stocks that could be effected are Tenet Healthcare (NYSE: THC), HCA Holdings (NYSE: HCA), Health Management Associates (NYSE: HMA), Community Health Systems (NYSE: CYH), and Vanguard Health Systems (NYSE: VHS).
While Medicaid HMO and hospital stocks might fall if the law is struck down, they could rally if it is upheld. Other names could also benefit. Back in March, Cramer recommended staffing companies Manpower (NYSE: MAN) and Kelly Services (NASDAQ: KELYA) if Obamacare is upheld. He said that he thinks healthcare companies will hire temporary workers instead of hiring full-time employees due to elevated expenses.
Alternatively, there are a whole host of stocks and sub-sectors of healthcare that should benefit on a decision against Obamacare. Names that are poised to gain from this outcome include major insurers such as Aetna (NYSE: AET), Cigna (NYSE: CI), and Coventry Health Care (NYSE: CVH). These companies generate profits across the three main insurance segments of Medicare, Medicaid and commercial health.
The above companies also do not rely heavily on small group and individual insurance plans, which is the umbrella under which many of the newly insured would fall under Obamacare. Therefore, these insurers would not benefit a great deal from the individual mandate, but would be negatively impacted by burdensome rules if the legislation is upheld.
Alternatively, WellPoint (NYSE: WLP) does rely heavily on small group and individual insurance, but it too could be poised to reap significant benefits if the Act is struck down. Under Obamacare, the company would have to accept all patients and spend 80% of its collected premiums on patient care. Under the current system, WellPoint often rejects people who have pre-existing conditions and can raise premiums as it sees fit. If the healthcare legislation is upheld by the Supreme Court, it could constrict WellPoint's business and earnings potential.
The other segment of stocks that market participants are pointing to as potential beneficiaries of a decision against Obamacare are medical device makers. The Patient Protection and Affordable Care Act calls for an excise tax of 2.3% on total medical device revenue by 2013. This tax is designed to pay for expanded Medicaid coverage under the legislation. Among the names that could rally if this headwind was removed are Intuitive Surgical (NASDAQ: ISRG), Medtronic (NYSE: MDT), and Boston Scientific (NYSE: BSX) - among others.
Overall, investors are not expecting huge moves in the healthcare sector once the Supreme Court's decision comes down, as the market has had time to build different outcomes into stock prices. Nevertheless, quite a few individual names could be volatile next week before and after the ruling comes out.
Investors should also keep in mind that any decision could be viewed positively by the market as it will remove a significant overhang of uncertainty from the healthcare landscape. Market participants equipped with a solid understanding of the stocks that are set to benefit - or lose out - under the various potential scenarios should be able to find some catalyst-driven opportunities in the wake of next week's landmark Supreme Court vote.
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