Look for nuances in health stocks after ruling
LOS ANGELES (MarketWatch) -- As the clock ticks down to the U.S. Supreme Court's ruling on the health-care overhaul bill, investors wait and wonder how significant a shift there will be once the justices hand down their verdict.
The general consensus has been that insurers and hospitals should be braced for a storm of selling or buying, depending on whether the high court strikes down all or portions of the landmark 2010 legislation, or upholds it entirely when it is expected to hand down its ruling Thursday morning.
But it's more nuanced than that, says Michael Gregory, who manages two funds affiliated with Highland Capital Management. There are some companies in those sectors that may not feel any pain at all, and a few may make a double-digit move in the wake of the ruling.
Further, the two may make for an interesting combination in investor portfolios, he adds.
"We actually think that owning hospitals and commercial insurers is a sound approach heading into the decision," he said.
Gregory says that if the court overturns the entire law, hospital shares will drop by as much as 10% to 15%. But that would be offset by insurers, which would probably offset those losses. If the entire law is upheld, then hospitals will rise 10% to 15% and insurers would be neutral.
Either of those scenarios, however, are unlikely in Gregory's view. The chances that the court will uphold the law fully are 30% to 40%, and a complete overturn has only about a 25% chance.
What is more likely, he says, is that justices will strike down the individual mandate requiring everyone to buy insurance, which he calculates as having a 60% to 70% chance of occurring. If only that part of the bill is struck down, it will put pressure on insurers, who still will be forced to offer coverage to everyone.
That may not be as serious as it appears, though. While many fear a huge rise in premiums, that may not come, says Christine Eibner, an economist with Rand Corp. who recently authored a study on the effects of the individual mandate's possible demise.
The government still will be offering subsidies to many individuals, and that could expand if the mandate is struck down, easing the burden on carriers, she said. She sees premiums rising 2.4% on average if only the mandate is struck down.
"It's not a death spiral," she said. See Mark Hulbert's column on health-care stocks and the Supreme Court ruling.
Gregory said a number of carriers specializing in Medicaid --
That's also unlikely, Gregory says. One insurer that is likely to remain unscathed is
Commercial insurers such as
Gregory says if justices strike down the mandate along with requirements that insurers cover everyone, that probably would lift shares about 5% since carriers would be off the hook on the key provisions of the bill. He considers that the most likely scenario.
Analysts have been most concerned about hospitals, which stand to lose most in any upheaval involving the law. One key outcome from the law was that hospitals would have far fewer indigent patients -- who must be treated in any emergency -- without insurance.
"I think hospitals are the most leveraged," said Les Funtleyder, portfolio manager at Miller Tabak.
Sheryl Skolnick, analyst at CRT Capital Group, said large operators such as
"I think the hospital stocks would go down if the mandate goes away," she said.
Gregory says, however, if the entire law is upheld, and if President Barack Obama is re-elected this fall, it could be a boon to the sector. He says hospital shares could rise as much as 50%.
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