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Healthcare Changed Before Obamacare Supreme Court Ruling

NEW YORK (TheStreet) - It's no secret that the Supreme Court's looming decision on President Obama's Affordable Care Act looms large over the healthcare stocks. Still, investors may wise to spend their time understanding how consolidation is already reshaping the healthcare sector ahead of the June decision.

The Supreme Court will decide whether or not Medicaid is expanded, potentially having biggest impact on Medicaid HMO's like Amerigroup (AGP), Molina (MOH) and Centene (CNC). Diversified healthcare providers like Aetna (AET), Cigna (CI), like UnitedHealthcare (UNH) and Coventry (CVH) will also be watching.

Forget the SCOTUS decision, the market has already changed for healthcare stocks

As investors weigh the decision's impact on HMO and healthcare stocks, they may want to focus how recent M&A moves are already altering the drug store and pharmacy benefits manager piece of healthcare. Recent deals signal that big changes are underway, even as many - including the President -- hold their breath on the landmark court decision.

This week, the nation's largest drug store chain Walgreens (WAG) committed to what could wind up being a $27 billion acquisition of European pharmacy giant Alliance Boots by taking a 45% stake in the private equity owned chain for $6.7 billion. Walgreens shares tumbled to 52-week lows on the deal, as many questioned the company's strategy to become an international pharmacy giant, over a focus on resolving a contract standoff with Express Scripts (ESRX), one of the nation's largest pharmacy benefits managers.

Walgreens decision can't be seen in isolation, and a closer look reveals the frenetic changes underway in drug stores and pharmacy prescription plans, which touches nearly every American.

In April, the Federal Trade Commission approved Express Scripts' $29 billion acquisition of Medco Health Solutions (MHS), in a move to take on CVS Caremark (CVS), the nation's leading pharmacy benefits manager. In its approval, the FTC said that it allowed concentration of the sector because of a fast-changing competitive landscape.

Underscoring big changes to the sector, in its approval of the merger, the FTC noted healthcare reform and the entrance of some of the nation's top health providers - currently awaiting the SCOTUS decision -- as reasons that the top three pharmacy benefits players don't control the market.

"[A] number of health insurers have made substantial investments and renewed their efforts to expand their PBM offerings, spurred by the passage of healthcare reform and the creation and implementation of Medicare Part D," said the FTC. Those plans include UnitedHealth, Humana, Aetna, and Cigna, according to its published review. In fact, Medco sought an acquisition by Express Scripts because it expected to lose contracts to health plans that were bringing prescription programs in-house.

In October, Cigna (CI) bought Healthspring (SXCI), a healthcare provider with a big pharmacy unit, in a near doubling of its PBM unit.

After the Express Scripts and Medco merger passed FTC tests, Walgreens faced both losses on its Express Scripts standoff and the prospect of losing billions in Medco contracts, prompting its Alliance Boots purchase, according to many analysts. Meanwhile, smaller players like SXC Health Solutions (SXCI) and Catalyst Health Solutions (CHSI) recently merged in a $4.4 billion deal that many expect will create a scrappy new challenger in the pharmacy benefits space.

With concentration in the pharmacy sector at the upper bound of what the FTC would likely be willing to stomach after CVS's acquisition of Caremark RX in 2007, analysts like John Heinbockel of Guggenheim Securities discounted Walgreens ability to cut a giant scale deal in the U.S. such as an acquisition of Rite Aid (RAD), amid speculation of a potential deal earlier in 2012. With recent M&A efforts in mind and the prospect of U.S.-based contract losses, Walgreens decision to go international may make more sense.

So how might investors interpret the changes underway in the pharmacy benefits space, as they await the Supreme Court's decision.

Heinbockel of Guggenheim is bullish on Rite Aid -- in spite of the company's billions in debt - because it may pick up U.S. market share from Walgreens as it loses customers on its Express Scripts standoff. On Thursday, Rite Aid's stronger than expected quarter earnings helped to vindicate Heinbockel's call in March for investors to focus on the company's earnings over a potential Walgreens takeout. After Walgreens international move, those earnings may only continue to be bolstered.

Stock quotes in this article: WAG, RAD, ESRX, SXCI, CI 

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