Health care companies can't seem to shake their legal headaches. Even managed care players -- which have rallied hard for years -- are feeling some pain. On Monday, the U.S. Supreme Court upheld a lower-court ruling that could lead to huge settlement bills for some giant health management organizations. The ruling opens the door for a September trial against six HMOs accused of conspiring to violate federal law by failing to properly pay physicians. Two major HMOs, Aetna ( AET) and Cigna ( CI), have already paid about $500 million each to settle their portion of the five-year-old lawsuit. Goldman Sachs analyst Matthew Borsch warned on Tuesday that the remaining defendants -- Coventry ( CVH), Health Net ( HNT), Humana ( HUM), Pacificare ( PHS), UnitedHealth ( UNH) and Wellpoint ( WLP) -- could take an even bigger hit. "Plaintiffs are seeking billions in damages for claims paid over the past 10 to 15 years," wrote Borsch, who has a cautious view on the sector. And "settlement amounts going forward may be somewhat higher than for AET and CI, as is usually the case with this type of litigation, and because the plaintiffs have a stronger case now that the industry's appeal has been denied." Still, Borsch portrayed the appeal as a long shot anyway and predicted that the ruling would come as no surprise to the market. Most HMO stocks barely budged on Tuesday morning.
Meanwhile, ailing hospital companies continue to suffer. And Banc of America analyst Gary Taylor on Monday cautioned investors against banking on a recovery anytime soon. "Many investors we have talked to recently believe that hospital stocks may outperform in 2005 simply because they underperformed in 2004," wrote Taylor, who has a bearish view of the sector. "We can't agree with that line of thinking." Taylor went on to explain that hospitals continue to suffer from weak fundamentals, especially pricing pressures from both commercial and government payers. In addition, he noted that the last time investors banked on an industry rebound -- after Tenet's ( THC) blowup in 2002 -- they wound up disappointed.