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Are Hospital Stocks in Trouble if Obamacare Is Replaced?

Zacks Equity Research

The Trump administration is steadily moving toward restructuring the federal healthcare law. Such an action comes as no surprise since President Trump has always been an outspoken critic of the Affordable Care Act, or ACA, popularly known as Obamacare.

Trump Alternative

In place of Obamacare, the Republican proposal called The American Healthcare Act (AHA) means to bring far-reaching changes. The alternative proposes radical changes like eliminating taxes mandated under Obamacare. The most controversial topic from the new Republican health draft is the phasing out of the Affordable Care Act’s Medicaid expansion. At the same time, it seeks to retain some of the existing legislation’s more popular provisions.

One can say the Republican alternative often termed as “Obamacare Lite” maintains the bare framework of the Affordable Care Act. However, the uncertainty over the source of costs accrued to the government has not yet been resolved. Also, the extent of the effect on varied sections of the society is not yet clear.

The Republican proposal seeks to change the mandatory requirement to purchase insurance with a system of penalties to be imposed by insurers. It also aims to replace subsidies with tax credits that are refundable. Also, the burden will be put more on the state level. Finally, all the taxes levied under Obamacare would be abolished. On the flip side, insurers will have to provide coverage to individuals regardless of any preexisting condition.

CBO Projection Painting a Different Story

In such a mixed scenario, a projection by the Congressional Budget Office (CBO) has added fuel to the debate. Per the projection, in a decade from now, approximately 24 million Americans would lose insurance coverage if the Obamacare replacement is passed. However, the CBO is also of the opinion that federal deficits would fall by $337 billion between 2017 and 2026 under the replacement bill.

Effect on Hospital Stocks

The foremost question that arises now is whether hospital stocks stand to gain or lose on Capitol Hill. Supporters for the Republican alternative argue that if the proposed changes are implemented, the sector would get paid for several services that earlier had to provide free of charge.

Opponents point out that the customer base would shrink as a significant chunk of the population would lose their healthcare coverage. Per various statistical reports, it is being estimated that around 6–10 million Americans will lose coverage under the new healthcare act.

We believe that major hospital stocks like Universal Health Services, Inc. UHS, HCA Holdings, Inc. HCA, LifePoint Health Inc. LPNT, Tenet Healthcare Corporation THC, and Community Health Systems, Inc. CYH will suffer on concerns that an increase in the uninsured rate will see them serving more poor patients and patients having to pay them on their own (without insurance cover). This would lead to an increase in bad debts.

The market perception can be gauged from the fact that of the above stocks, only HCA Holdings currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here. Overall the Zacks classified Medical-Hospitals sub-industry posted a meager gain of only 1.08% over the past one month. Also, the current level compares unfavorably with the S&P 500’s return of 1.94% over the same time frame.
 

Medical - Hospital Industry 5YR % Return

 

Medical - Hospital Industry 5YR % Return

End Note

With stakes so high it is not surprising that the House Budget Committee postponed its consideration of the bill to Thursday from Wednesday. Though the wind is blowing heavily in favor of the replacement bill, nothing as of now is certain.  But the proposals and many options under considerations are enough to send jitters across the hospital space.
 

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Universal Health Services, Inc. (UHS): Free Stock Analysis Report
 
Tenet Healthcare Corporation (THC): Free Stock Analysis Report
 
Community Health Systems, Inc. (CYH): Free Stock Analysis Report
 
LifePoint Health, Inc. (LPNT): Free Stock Analysis Report
 
HCA Holdings, Inc. (HCA): Free Stock Analysis Report
 
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