Latest Obamacare Lawsuits Could Hurt Walgreen And CVS Caremark

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A recent court decision could end tax credits that pay for health insurance for 7.3 million Americans.

Walgreen and CVS Caremark are heavily dependent on prescription revenues generated by health insurance payments.

The end of Obamacare subsidies could end the massive revenue growth that Walgreen and CVS Caremark have been experiencing in recent years.

There's an even bigger issue than tax inversion facing Walgreen (WAG) in the United States in the near future. An ongoing legal challenge to Obamacare could end tax subsidies that pay for health insurance for 7.3 million Americans.

The U.S. Appeals Court for the District of Columbia ruled that Obamacare tax subsidies for private health insurance policies are illegal in states without a state-run health care exchange in a case called Halbig v. Burwell on July 22. If it is upheld by higher courts, this ruling could effectively shut down the health insurance exchanges in the 36 states where they are run directly by the federal government.

The future of those exchanges is clouded because the Fourth U.S. Circuit Court of Appeals ruled that the subsidies are legal in a case called King v. Burwell on the same day. The issue in the two cases is whether the Affordable Care Act gives states or the federal government the power to issue the subsidies. Legal experts think that the U.S. Supreme Court will have to settle the issue because of the conflicting opinions.

The Problem for Drugstore Operators

These cases could have a big impact on drugstore operators like Walgreen and CVS Caremark (NYSE:CVS) because they depend on prescriptions for a large portion of their revenues. A lot of their customers rely on health insurance to pay for those prescriptions.

The end of the Obamacare subsidies could put the brakes on the big growth in TTM revenues that CVS and Walgreen have both seen in recent years. CVS has seen its TTM revenue grow from $116.5 billion in June 2012 to $123.61 billion in June 2013 to $132.04 billion in June 2014. Walgreen's TTM revenue went from $72.53 billion in May 2012 to $71.35 billion in May 2013 to $75.28 billion in May 2014.

Walgreen's revenue fell in 2012 and 2013 because of a contract dispute with Express Scripts (NASDAQ:ESRX). During the dispute, Walgreen stopped honoring Express Scripts' prescriptions, which caused its customers to go elsewhere.

The Walgreen Express Scripts dispute could be a preview of what will happen if the Obamacare tax credits are ended or disrupted by the Halbig case. Even a temporary disruption of insurance benefits would cut into the drugstore operators' revenues. The effects of this disruption are hard to gauge because the legal cases would only affect the 36 states where Uncle Sam runs the Obamacare exchanges. The 14 exchanges run directly by states would not be affected.

The potential effects of the Halbig decision show that drugstores are not the reliable value some investors think they are. Their reliance on the health insurance industry and, increasingly, the government puts them on very shaky ground.

This could be a real problem as drugstores face growing competition from Wal-mart Stores (WMT), Costco Wholesale (NASDAQ:COST), and grocers like Kroger (NYSE:KR). Wal-mart in particular is attempting to tap into CVS's and Walgreen's neighborhood drugstore business with its Walmart Express small box operations. Walmart Express threatens drugstores because many of its outlets will contain pharmacies.

It's been a bumpy ride for Walgreen shareholders this year, and it looks like that ride is far from over. Both Walgreen and Caremark CVS are going to have a hard time maintaining their revenues if the Supreme Court upholds Halbig. Having a business model that relies on tax credits and government subsidies doesn't guarantee stability.

Disclosure: The author is long KR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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