ObamaCare Upheld: Health Care Stock Winners and Losers

NEW YORK (TheStreet) -- Despite increasingly dire predictions from virtually all sources, the Supreme Court of the United States today voted 5-to-4 to support President Obama's healthcare reform law, known formally as the Patient Protection and Affordable Care Act (PPACA). Surprisingly to many conservatives, Chief Justice John Roberts joined the majority. This is almost exactly in-line with my predictions from few weeks ago and finally removes the uncertainty that has hovered over healthcare for the past few years.

The decision was just announced so these are my first impressions, but I think the ACA ruling is a clear positive for nearly all subsectors of healthcare. Investors, both professional and retail, at last know what the landscape for healthcare will look like over the next decade. The removal of uncertainty, a killer for investor confidence, is critical.

Importantly, the Supreme Court upheld the individual mandate; this provision requires that everyone have health insurance or pay a penalty, which the Court found constitutional under Congressional powers to tax. (Ironically, the Administration had been defending the mandate largely based on the Commerce Clause, which gives the Federal government the ability to regulate interstate commerce.) In upholding Title I of the ACA (which includes the mandate), several related provisions -- such as guaranteed issue, which forbids denial of coverage, and community rating, which limits the premium differential between the healthiest and sickest individuals -- remain law. The profitability limits on managed care companies, known as medical loss ratio (MLR) minimums, also stays put. I think managed care can manage (pun attack!) these changes.

3 Health Care Stocks to Trade (or Not)>>

Although investors' reaction thus far has been to sell the public managed care stocks -- WellPoint (WLP), United Healthcare (UNH), Aetna (AET), and Cigna (CI) -- I think that's a mistake and more reflective of short-term sentiment, which had favored repeal of the mandate, than longer-term fundamentals. If I had to pick, I would buy Cigna right here. The company has very little ACA exposure, a good management team, and a solid business. Most of the others should recover over time as well.

A word of caution: The court partially invalidated the ACA's Medicaid expansion, which could be a point of confusion for managed care companies focused on Medicaid, such as Centene (CNC) (United Healthcare (UNH) also has a significant Medicaid business). Essentially, the Court ruled that Congress could not threaten penalties (read: take away funding) if a state failed to comply with the Medicaid expansion. This might create uncertainty about what states will do, given obviously strained budgets. On the other hand, these companies will still get more patients. I'm not really sure how to think about this, so I'm going to stay away from the Medicaid stocks for now.

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