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What the Supreme Court's "Obamacare" Ruling Means for Health Care Stocks
By: David Sterman
Cooler heads have prevailed. A showdown between the executive branch of government and the judicial branch of government looked to usher in a new era of intra-governmental rancor that our Founding Fathers sought to avoid. But the Supreme Court's decision to let much of the Obama Administration's health care law stay intact is a victory for anyone who wants to see policy makers in Washington move forward -- not backward -- in addressing many of our nation's major's fiscal challenges.
Opinions vary widely on the merits of the far-reaching legislation, with detractors on both sides of the partisan aisle (albeit for differing reasons). Yet many agree that health care is in need of some sort of fix. For roughly two decades, we've been spending a rising percentage of our gross domestic product ( GDP ) on health care (which by some estimates has reached 17%) without a commensurate increase in the quality of care we receive.
The Obama administration's goals of expanded coverage and streamlined costs through the use of best practices are laudable. The proof, as they say, will be in the pudding. Chances are, the plan will need to be tinkered with as some anticipated benefits fail to materialize. For example, hospitals will be rewarded (or punished) as they move to meet goals of improved patient outcomes. Quickly and radically improving the delivery of hospital-based health care is more daunting than you might think.
Yet even if the plan achieves all of its goals, a range of health care segments will either benefit or suffer from the legislation. Back in the beginning of June, I gave my take on the health care law itself and how the Supreme Court's possible decisions would affect various health care sectors and stocks. And despite how you may feel about the legislation itself, you need to be aware of the winners and losers so that you can position your portfolio accordingly.
Clear winners from this landmark ruling include:
• Hospitals that no longer need to shoulder the burden of uninsured emergency room patients who can't pay their bills when they come due. (These hospitals will also benefit from an increase in higher-margin elective surgeries as more patients get coverage).
• Health insurers that will gain access to millions more new patients.
As I said in my previous article, "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 insurance. "
Stocks that could benefit from this ruling include Coventry Health (NYSE: CVH ) , United Health (NYSE: UNH ) , Humana (NYSE: HUM ) , and Aetna (NYSE: AET ) , although I would caution against buying these stocks strictly because of this news, as some experts feel differently about whether these stocks would benefit, and it will likely take a while for this to play out before we really know for sure.
On the flip side, any companies that sell medical devices or pharmaceuticals are faced with a stark reality. Reimbursement pressures are rising and will get even more severe. A key goal of the health care overhaul is aimed at utilizing the lowest-cost treatment option , assuming outcomes are equal.
As a result, look for medical-device makers to start investing only in new products that have lower price points than products that are currently on the market (or at least yield vastly superior outcomes that save money in terms of post-treatment follow-up). Boston Scientific (NYSE: BSX ) is a specific stock in this sector that got hit on news of the ruling.
Pay close attention to stocks in these two sectors, as a number of other challenges are facing them, and this could be the kind of thing that causes a wave of selling.
Risks to Consider: As I alluded to earlier, it's difficult to say exactly how all this will play out. As someone who's watched this very closely, I can only offer my best informed guess. You will need to study a stock closely, judging it by its own fundamental merits, in addition to the context of today's ruling.
Action to Take --> The Supreme Court's ruling doesn't mark the beginning or end of our nation's ongoing healthcare crisis, but is simply another mile marker along the way. In the next five or 10 years, look for further discussions about how to improve or alter the delivery of health care as it becomes increasingly apparent that cost pressures have not fully gone away.
But with these challenges come opportunities to profit . Whether it's a biotech company developing the next life-saving cancer treatment , or a software company that will help hospitals and doctor's offices transition to electronic medical records , the health care sector is one well worth watching -- and one that can be very lucrative for smart investors who make the right moves.
-- 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.