What Court Ruling Means for Health Stocks

SmartMoney

As the Supreme Court hearings get underway Monday, analysts say there’s more at stake than just the fate of  President Obama’s health-care reform:  The fortunes of a slew of health care stocks may also hang in the balance.

A ruling on whether or not Congress surpassed its constitutional powers by mandating most Americans buy health insurance, could impact a wide range of firms, experts say – although insurers that do a lot of Medicare business should have less to lose than those that focus on workplace plans. “I would expect healthcare insurance companies to react favorably to Obama’s health care law,” says David Abuaf, chief investment officer at Hefty Wealth Partners in Auburn, Ind. But companies that create healthcare products may also have a lot on the line, he says.

Insurance companies are the most likely to be directly affected, experts say. They will need to spend less on sales and marketing costs than at present, and have a new pool of readymade customers, says Kevin Flynn, president of Healthcare Advocates. Helped by an already strong stock market, insurers already surged over the last two years: Aetna (AET) rose 32% since March 23, 2010, UnitedHealth (UNH) 69%, Humana (HUM) is up 85%, though WellPoint (WLP) edged up just 5.6%. And based on those performances, some analysts are betting that “Obamacare” will sail through the current Supreme Court hearings without any major changes. “We believe the Supreme Court will likely uphold the Affordable Care Act,” says Sarah James, healthcare equity analyst at Wedbush Securities.

Laboratory testing firms could also rise or fall based on the Supreme Court outcome, Abuaf says. “If you’re effectively forcing people to go to the doctor, they will end up getting more prescriptions,” Abuaf says. Of course, just like insurance firms, many of these companies’ stock prices have already risen along with the buoyant stock market since Obama signed the measure bill into law on March 23, 2010. Clinical laboratory services company LabCorp. of America Holdings (LH) rose 18% over that period, though others, like Quest Diagnostics (DGX), rose just 3%. Abuaf expects them to see an increase in demand as more people, once compelled to take out insurance, will be encouraged to see their doctors and take advantage of their coverage.

To be sure, even if Obama’s health-care reform goes through relatively unchanged, significant risks remain in healthcare stocks, experts say. With an estimated 25 million more Americans expected to take out coverage, insurers could be inundated with an onslaught of previously undiagnosed diseases which will increase claims, Flynn says. “The inclusion of pre-existing conditions in insurance policies could also boost claims,” he says. And medical device companies will also have to pay a 2.3% excise tax on sales, which is expected to cost $20 billion a year, says Raj Denhoy, healthcare equity analyst at Jefferies & Co. These companies include Medtronic (MDT), Stryker (SYK), Zimmer (ZMH) and Boston Scientific (BSX); Denhoy says they underperformed the S&P 500 for the last two years.

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