Health Care Stocks Could Get Banged Up by Obamacare Ruling

NEW YORK (TheStreet) -- Health care stocks are likely to take it on the chin -- at least temporarily -- if the Supreme Court rules against a key component of Obamacare later this month.

The high court is expected to rule soon on King vs Burwell, a challenge to the Affordable Care Act that could effectively gut Obamacare by eliminating federal subsidies and making health insurance prohibitively expensive for nearly 8 million Americans.

The question for investors is whether the health care industry can absorb that kind of a loss in premiums, prescription purchases, hospital billing and doctor fees if the justices rule against the government.

Jefferies & Co. analyst Brian Tanquilut believes a decision against Obamacare would drive health care stocks -- primarily those for publicly traded hospitals -- down at least 10%. But Tanquilut also cautions that this knee-jerk reaction would be short-lived, for two reasons.

First, mitigation efforts by both the federal and state governments "will kick in pretty quickly as politicians will figure out how to comply with the law" while maintaining subsidies for individuals, Tanquilut says.

Second, hospital stocks already have been trading at a discount due to concerns about the pending Supreme Court decision.

"Once there is a new bill from Congress [to comply with the court decision], these stocks will begin to react positively," Tanquilut predicts.

And while hospital stocks have the most sensitivity to the decision, they also stand to gain the most from a decision in favor of the government.

Since the implementation of Obamacare, the reduction in uncompensated medical costs has been a boon to the industry.

HCA Holdings (HCA) reports that same facility self-pay and charity admissions fell close to 9% for the fourth quarter of 2014. If the law is upheld, hospitals, which have had to accept smaller payments from Medicare and Medicaid though Obamacare, will have far fewer patients without insurance coming through their doors.

For the pharmaceutical industry, Obamacare has been a mixed blessing. Drug companies have had to make concessions on how much they can charge so that the government could reduce costs to Medicaid and Medicare. In return, Washington allowed a longer period of patent protection on biotech drugs, and increased restrictions on cheaper drugs coming in from Canada. This could ultimately produce $10 billion to $35 billion in additional profits for pharmaceutical companies from Obamacare through 2023, according to a report from GlobalData of London. This translates into a market value of $476 billion by 2020, an increase of 33% from today.

But the sector most insulated from a decision against Obamacare is the behavioral health industry. Tanquilut sees companies like Acadia Healthcare Company (ACHC) and American Addiction Centers (FTER) as being in the best position to absorb a decision against the government. While Acadia Healthcare's 88% gain since October 2013 pales in comparison to the 96% appreciation seen by HCA Holdings, the sector is also less likely to see any major disruptions due to a Supreme Court decision for the plaintiff.

Unfortunately, no matter which way the justices rule, opponents of Obamacare will continue to dissect the minutia of the legislation, hunting for any inconsistencies in its verbiage or its legality. Assuming the court doesn't strike down the federal subsidies, health care stocks will enjoy a temporary period of prosperity before the next challenge is introduced, and the discussion begins again.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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