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TheStreet Open House

Obamacare Ruling Won't Change Health Care Dealmaking

Stocks in this article: HCAFMSHUMDVAMDFCI

NEW YORK ( TheStreet) -- The U.S. Supreme Court's decision to uphold President Obama's Affordable Care Act will have a major and lasting impact on the health care sector. However, the earth-shaking confirmation leaves the need for health care company mergers relatively unchanged.

As investors react to the Supreme Court's decision, they may be wise to spend their time understanding how consistent M&A trends are already consolidating the health care sector, with many deals expected in coming quarters and years. Already, some companies have used recent mergers to position themselves for key earnings opportunities.

"There is a very basic level of consolidation that is taking place," says Marc Cabrera, the head of the healthcare investment banking practice at Morgan Joseph TriArtisan, of widespread healthcare sector M&A efforts. He highlights a consistent drum of mergers among physician practices, hospitals and pharmacy benefits managers as indicative of the needs for companies in the healthcare sector to grow their scale, regardless of the Supreme Court's decision.

On Thursday, the court confirmed the Act's ability to force Americans to carry health insurance and compel insurers to cover people with pre-existing health conditions. The Supreme Court; however, limited the extension of Medicaid, deeming it unconstitutional for the federal government to withhold money from states that don't comply with the Act.

For companies tied to healthcare plans subsidized by Medicaid and other government programs or unsubsidized private market plans for corporations and individuals, Cabrera sees a relatively similar set of challenge to grow their scale and earnings, regardless of the outcome. Companies will be pressured to figure out a way to grow the bottom-line in a health care market that's likely to become far more cost-competitive. "We do not see that the cost trend today is sustainable, therefore to be a winner in the future you need to be bigger and have economies of scale," says Cabrera, who's interview came ahead of the court's ruling.

Recent deals like dialysis specialist DaVita's (DVA) $4.42 billion acquisition of privately-held physician practice HealthCare Partners and health-insurer Humana's (HUM) acquisition of hospital chain Concentra in 2010 highlight how healthcare sector players are scaling their operations, regardless of what the Supreme Court leaves intact from the Affordable Care Act, notes Cabrera.

"The trend of consolidation is the rule," Cabrera adds.

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