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Supreme Court ruling causes big swings in healthcare stocks

After the Supreme Court's healthcare ruling, shares of hospital and Medicaid providers rise while stocks of big insurers generally decline.

June 29, 2012|By Walter Hamilton and Andrew Tangel, Los Angeles Times
  • A trader follows news on the Supreme Court decision on the floor of the New York Stock Exchange. The Dow skidded more than 175 points before a rally in the final 90 minutes of trading cut the loss to about 25 points.
A trader follows news on the Supreme Court decision on the floor of the New… (Richard Drew, Associated…)

Healthcare stocks swung wildly as investors scrambled to figure out how the Supreme Court's ruling on President Obama's healthcare law would affect companies throughout the medical industry.

Shares of hospitals and Medicaid providers rose on investor assumptions that the companies would gain customers — many of them able to pay their bills now that the court upheld the so-called individual mandate. Hospital chain Tenet Healthcare Corp. rose 5.4%, while Medicaid provider Molina Healthcare Inc. jumped 8.6%.

Big insurers, meanwhile, generally saw their stocks fall as investors worried about the effect on earnings and profit margins as the full effect of the Obama administration's healthcare law sets in over the next few years. Wellpoint Inc. fell 5.2%, while Cigna Corp. lost 2.7%.

The high court's ruling drove down healthcare stocks early in the day and contributed to a sell-off in the broader market. The Dow Jones industrial average skidded more than 175 points before a rally in the final 90 minutes of trading cut the loss to about 25 points.

Although analysts had spent months sketching out the potential implications of various Supreme Court scenarios, investors nonetheless appeared to be caught flat-footed by the high court's ruling. Analysts rushed to assess what it portends for the healthcare sector.

"Now that the law is staying in place, there's a wide range of opinions about what this is going to mean for all these companies," said Matthew Coffina, senior healthcare analyst at Morningstar Inc. "Investors are scrambling to figure things out."

The shifting assumptions were on display in the shares of managed-care provider UnitedHealth Group Inc., which fell nearly 7% immediately after the ruling but recovered as the day progressed and finished with a small gain.

The Standard & Poor's 500 healthcare index declined 0.3%, although the index is up 25% since August.

Investors were pleased that the ruling eliminated some of the deep uncertainty that had hung over the sector, although their relief was tempered by expectations that the issue is likely to take on a higher profile in the November presidential election.

"Uncertainty has gone down but it's hardly a clean slate," said David Brailer, chief executive of Health Evolution Partners Inc., a healthcare investment firm in San Francisco.

For hospital operators, the law is a "huge positive for them long-term" because previously uninsured people would be required to buy coverage under the individual mandate, said Michael Wiederhorn, a healthcare analyst at Oppenheimer & Co.

"They're already taking care of this population," Wiederhorn said. "Now they're going to get paid for it."

HCA Holdings Inc., the largest U.S. hospital chain, surged 10.8%, while Community Health Systems Inc. jumped 8%.

Insurers, by contrast, could face short-term costs as they adapt to insurance exchanges put in place by the law, he said. Although the exchanges operating in each state could push down the costs of health plans, insurance companies stand to gain more customers because of the mandate, Wiederhorn said.

"In the long term, it should bring more paying people under coverage," he said.

Some other analysts agreed that insurers could be long-term beneficiaries.

"Investors are reacting to the perception that health reform is unequivocally bad for health insurers," Coffina said. "The law is not all that negative for all these companies in the way the headlines would suggest. That will become apparent over time."

Shares of Molina rose as investors sought to make sense of the Supreme Court's ruling on Medicaid.

The high court ruled that the federal government can't penalize states that refuse to go along with a planned expansion of Medicaid, the federal health program for the indigent.

Although theoretically a setback for the U.S. effort to broaden Medicaid eligibility, and to companies that provide Medicare services, many analysts say states ultimately will have to sign up with specialized companies as Medicaid grows larger and more complex.

"It's a challenge to take care of this population," said John Molina, the company's finance chief. "Our skill set is in dealing with a particular socioeconomic population and the learning curve on that is pretty steep."

In the broad market, the Dow fell 24.75 points, or 0.2%, to 12,602.26. The Nasdaq composite index was the day's big loser, declining 25.83 points, or 0.9%, to 2,849.49.

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