Health Care Stocks Vulnerable if Individual Mandate Struck Down

NEW YORK ( TheStreet) -- The U.S. Supreme Court could create a real conundrum for health care companies in June.

The court on Wednesday ended three days of oral arguments that have served to stoke uncertainty about the fate of the Patient Protection and Affordable Care Act, otherwise known as Obamacare.

Early forecasts have leaned toward the possibility that the justices would strike down the individual mandate of Obamacare, but uphold the rest of the law. Should that prediction become the formal decision announced in June, health care analysts aren't optimistic about the immediate effects on health care stocks.

"For the stocks, on the announcement, I think they're down, I've argued, 10% on that outcome. ...I think it's a push in the double-digit percentage-point decline in the stocks," said David Windley, senior health care analyst at Jefferies. "Sensibly because of the obvious adverse selection problem and the uncertainty about how bad that will be."

The "adverse selection problem" refers to all health insurers still being required to provide care regardless of pre-existing conditions despite the individual mandate, which would require all citizens to have health insurance, being declared unconstitutional.

In this situation, Windley said, only the sick would buy insurance. People would be able to wait until they were sick to buy health insurance as the companies wouldn't be allowed to deny care because of the pre-existing sickness.

"Relatively healthy people would just wait until they became sick, and then, you know, purchase a policy in the ambulance, so to speak," said Matthew Coffina, senior health care analyst at Morningstar.

Coffina and Windley both point to a hypothetical action Congress could take to possibly eliminate this problem in the event that the individual mandate no longer exists.

For example, they said, Congress could pass a law that creates "open enrollment windows" in which citizens could sign up for health insurance. A person would be permitted to pass on the enrollment, but if that person got sick and wanted to sign up for the insurance outside the enrollment window, he or she would be charged a penalty to pay on top of the premium.

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