When President Obama writes his memoirs, he will surely point to
Nov. 14, 2011 as one of the worst days of his presidency. That's
when the U.S. Supreme Court announced it would hear legal
challenges against the Administration's sweeping overhaul of the
United States' health care system. Administration officials spent
thousands of hours horse-trading with various members of Congress,
ultimately producing a document which, according to one recent
poll, roughly two-thirds of voters would like to see altered or
For more conservative voters, the legislation smacks of
government overreach and a loss of personal liberty. For liberal
voters, the overhaul didn't go far enough, leaving too many profits
on the table for private insurers, as the "publicoption " component
was negotiated out of existence.
Of course the Supreme Court won't simply hand down a ruling
based on a poll of current voter preferences. Instead, the
justices will look at various aspects of the legislation and
determine whether any or all aspects need to be rolled back.
With a ruling expected on or before June 25, it's time to prep
your portfolio for the various possible outcomes. (The Supreme
Court holds its press conference on Thursday, June 14, leading many
to expect an official announcement to come on June 14 or June 21
and not June 25, which is the last day of the current session.)
$938 billion must be found somewhere
The effort to expand health care insurance to all eligible citizens
would cost nearly $1 trillion, according to the Congressional
Budget Office. To pay for the legislation, the government would
save money or raise revenue by:
• Reducing payments to Medicaid and
providers ($320 billion in savings)
• Boosting taxes on medical devices and insurers ($100
• Adding transaction-based taxes to hospitals ($210
• Placing a "Cadillac Tax" on wealthy citizens ($30
• Penalizing citizens that don't buy mandatory insurance
• Reducing benefits in Medicare C , also known as
"Medicare Advantage" ($130 billion)
• Other streamlining that yields roughly $190 billion in
Some opponents of the legislation, even as they support its
goals, question the feasibility of these savings targets, adding
the legislation would only add to the government's
problems. But the Supreme Court is not assessing the likelihood of
government targets being met; it's solely focusing on how the
program affects the rights of states and individuals.
But the piecemeal nature of the legislation means that some --
though not all -- aspects of the legislation may be struck down.
Analysts at Bernstein Research assign a 50% to 70% likelihood that
the Court will recommend a partial rollback, and say there is only
a 15% chance the whole package will be shot down (and another 15%
chance that the Court will leave the legislation intact).
As far as the Obama Administration is concerned, a partial
rollback would have the same effect as a full rollback. By
eliminating any components needed for either cost-savings or
revenue generation, a huge funding gap would emerge, making it
nearly impossible to extend
to 32 million uninsured citizens.
Who wins? Who loses?
The nation's health care insurers are anxiously awaiting the
Court's ruling. These firms tacitly agreed to caps on their
margins in exchange for the chance to serve many more customers. So
a decision to strike down the mandate requiring all citizens to get
insurance without a corresponding decision to free them from the
profit-margin caps would instantly lead their
Conversely, if the Supreme Court struck down the requirement
that all citizens must buy health insurance, but maintained the
Obama Administration's plan to extend Medicaid to all uninsured
people , would lead to huge profit gains for health care insurers
that participate in Medicaid.
Molina Healthcare (NYSE:
would be among them. The entire group would see profits rise by
19%, according to Bernstein Research. It predicts a 20% chance that
this will be the ruling. (On June 11, these stocks took a sharp hit
as Centene warned of profit pressures. The timing of the
pre-announcement may have been more than coincidental.)
Insurers hate the idea of being forced to extend insurance to
high-risk patients. Yet they agreed to take on these patients as
long as all patients -- high-risk and low-risk -- were enrolled.
Insurers realized that if they had to cover any patients seeking
coverage, without all being required to participate, then people
would simply wait until they got sick to apply for
Based on comments from Supreme Court Justices in hearings a few
months ago, a majority of them appear inclined to strike down the
individual mandates and the guaranteed-issuance clause. If these
components of the legislation are shot down, then investors will
likely see an immediate rally in insurance stocks such as
Coventry Health (NYSE:
The "no-action" play
Analysts at Citigroup suggest that companies running for-profit
hospitals would see a huge rally if the Supreme Court decides to
take no action. They figure hospital stocks could pop up as much as
15% on decision day if "no action" is the verdict. Hospitals
currently take a huge hit to profits by providing emergency
services to many uninsured patients that fail to pay their bills.
The aim of the legislation was to eliminate this bad-debt risk.
These analysts say
Community Health Systems (NYSE:
Tenet Healthcare (NYSE:
offer the most upside from a "no-action" decision.
Yet Citigroup's analysts concede that a mixed verdict from the
Court is likely, returning to the pre-legislation status quo. Even
so, "the stocks might trade 5-10% higher on decision day as
perceived uncertainty declines." In such a scenario, they
Universal Health Services (NYSE:
as top hospital stock names, as they mayoffer the best risk/reward
profile in a mixed verdict.
Risks to Consider:
There may be a great deal of initial confusion if there is a
mixed verdict as to prospective winners and losers, so be prepared
for gut-wrenching swings in these stocks after the decision is
Action to Take -->
A decision to overturn parts of the legislation may in fact
make the entire legislation untenable. Indeed, a victory by
Republican presidential candidate Mitt Romney this fall would also
likely lead to the legislation's repeal. Still, many voters
understand that we pay too much for health care and receive too
little in return, so profit pressures for health care providers,
drug firms and medical-device makers are likely to deepen --
regardless of who will be sitting in the Oval office next year.
This means it may be wise to book profits if any of these
sectors have a relief rally as we return to the status quo for now.
Otherwise, if you're feeling bold enough to read the tea leaves and
predict an outcome, then the stocks I mentioned above should be
your guide to profiting from the possible outcomes.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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