NEW YORK (
) -- 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
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.
Although investors' reaction thus far has been to sell the public managed care stocks --
-- 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
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.
The hospitals --
Community Health Systems
Health Management Associates
Universal Health Services
-- are the most obvious winners; implementation of the ACA should increase payments and reduce bad debt burdens. I still don't like these businesses generally, but I think some earnings multiple expansion will take place over the next few months.
I think the ACA is a negative for medical device companies -- particularly
. The medical device industry will now have to find ways to pass along ACA-associated penalties, despite limited innovation and ongoing pricing pressure. That will be a challenge, and I would be bearishly inclined over the long-term.
I don't really think there is a clear macro impact on biotech stocks like
. Winners will still win and losers will still lose. Innovation, or at least what passes as innovation, will still reign supreme. (As an aside: I'm not so sure the threat of biosimilars, basically biologic "generics," will turn out to be as big a deal as some investors believe although upholding the law means the 12-year exclusivity on biotech drugs remains in place.)
Pharma seems adequately prepared to deal with the taxes and will probably keep acquiring promising biotech companies and paying reasonable dividends. I like
the most of the pharma group.
Obviously, I haven't had the time to parse every nuance of the court's ruling, but I wanted to get some preliminary thoughts out for my readers. I must say I'm very excited to finally move forward. The uncertainty surrounding the ACA was awful and has made for a very difficult investment environment in healthcare. Overall, I think the future looks bright.
Disclosure: Sadeghi has no in any of the other stocks mentioned in this article.
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Nathan Sadeghi-Nejad has 15 years experience as a professional health-care investor, most recently as a sector head for Highside Capital. He has worked on the sell side (with independent research boutiques Sturza�s Medical Research and Avalon Research) and the buyside (at Kilkenny Capital prior to Highside). Sadeghi-Nejad is a graduate of Columbia University and lives in New York. You can follow him on Twitter @natesadeghi.