By David Sterman
We're just weeks away from a major legal ruling that will spell profit or loss for investors in health care stocks.
Will the Supreme Court rule that the Obama administration overreached when it radically revamped the healthcare landscape? Or will it let the new health care legislation -- formally known as the Patient Protection and Affordable Care Act, but best known as "Obamacare" -- stand?
Right now, the outcome is likely a toss-up. Plaintiffs scored some solid points in front of the Supreme Court justices a few months ago. But those justices may err on the side of caution and let the health care changes stay intact.
According to Intrade.com, 57.6% of polled respondents think the Supreme Court will turn back the legislation. Even if they don't, however, a change of control in the White House this fall could also spell the end of Obamacare.
Whatever the Supreme Court decides, some companies will emerge as winners, others as big losers. But it's all about knowing which will be which. And now's the time to adjust your investment stance to prepare for possible setbacks to this far-reaching legislation.
Hospital Chains Impacted Greatly
To understand the impact of the Supreme Court's looming decision, you have to step back and see how investors had been positioning their portfolios for coming changes to the healthcare landscape.
Who would benefit the most from Obamacare, according to Wall Street analysts? Companies that run for-profit hospital chains.
Hospitals have faced a perennial problem: People that are uninsured tend to avoid seeking medical attention when a problem initially appears, and instead wait until it blooms into a major problem. At that time, they head to the emergency room, which is always costly.
Yet many of these same uninsured people lack the ability to pay for the large hospital bills that often ensue. So hospitals treat them, but then have a hard time collecting the money.
With the legislation's mandate that compels all citizens to buy health care insurance, hospitals would no longer need to worry about their huge cost of providing care to the uninsured. Analysts expected these hospital chains to report steadily improving results once the legislation was enacted, as their bad debt expense steadily dropped. Yet with the current legal challenges to Obamacare, investors have changed their minds. Hospital chain operators like Tenet Healthcare (THC), HCA (HCA) and Vanguard Health Systems (VHS) have all seen their stocks fall by 30% -- or more - from a year ago.
The Road Ahead: If Obamacare moves forward, hospital volumes could move well higher as more patients are insured, giving a fresh rebound to these shares.
Benefiting From Records Going Digital
Obamacare also sought to increase the accuracy and lower the cost of medical records by compelling hospitals, doctors, pharmacists and others to stop using pen and paper and start developing electronic medical records (EMRs). For investors, that meant rising expectations for companies that deal with EMRs -- such as Cerner (CERN) and Allscripts (MDRX) -- or other digital technologies such as imaging software, provided by firms like Merge Healthcare (MRGE).
In anticipation of these looming changes, medical professionals had already begun to aggressively move into the digital world. Yet the Supreme Court challenge to Obamacare had led to a major pause. Shares of Allscripts and Merge Healthcare have recently tanked in the face of slowing growth, and management at each firm warns that the sudden slowdown in sales may last a while.
The Road Ahead: The move to EMRs is likely inevitable now that the process is underway. Health care practitioners had been slow to adopt digital medical records, but they are moving in that direction now, even if recent quarterly results give the appearance of a pause. As a result, the steep share price drop for Allscripts and Merge may prove temporary -- and present a buying opportunity.
Hit Hard By Cost Pressures
Obamacare was also set to provide real pressure in other areas of healthcare by putting virtually every medical device or drug under much greater scrutiny. Each product was set to be measured against competing devices (or drugs) to make sure that expensive products that yielded no extra benefit would be de-emphasized. As the single largest payor of health care services (as a result of Medicare and Medicaid), the government exercises considerable clout in determining winners and losers in the marketplace.
For companies such as Boston Scientific (BSX), Medtronic (MDT) and Johnson & Johnson (JNJ), the increasing scrutiny of various devices has already led to revenue pressures for many longstanding products. That explains why these companies have been making many acquisitions in recent years, so new products can offset the slump seen with existing products.
In a similar vein, drug makers are already seeing the pressures of cost-containment. Not only is there a strong push underway to get consumers to switch to lower-cost generic drugs whenever possible, but any new drugs in the pipeline are now being eyed more warily by investors. If a company has developed an impressive but very expensive drug, then it may be hard for sales to take off.
Case in point: Dendreon's (DNDN) Provenge drug, which has proven effective in adding several months to the lives of late-stage prostate cancer victims. Provenge's $90,000 price tag for a full course of treatment has turned out to be a major impediment, and some investors have been badly burned with this stock.
The Road Ahead: Cost pressures are here to stay, and an increasing number of medical devices and drugs will lose the reimbursement endorsement of Medicare and Medicaid. (Medicare and Medicaid reimbursement policies often set the tone for private insurers reimbursement plans as well). If you own any of these stocks, you should re-assess their key products in terms of pricing, efficacy and competitive alternatives. That's the process that Uncle Sam uses, and high-priced products may see demand drop.
Changes Are Coming
Even if the Supreme Court rules against Obamacare or a change in the Oval Office comes to pass and the plan is struck down by fiat, investors should expect to see some changes to healthcare. Yet if Obamacare is cut down, it will be highly unlikely that we'll see the concept of mandatory health care insurance any time soon. Simply put, our nation's electorate is divided, and half of voters think the broader set of citizens shouldn't help subsidize the cost of healthcare for the (usually financially weaker) uninsured.
But what if the Supreme Court decides to support Obamacare? Well, those struggling hospital stocks would get an instant lift. The prospect of greatly reduced losses from uninsured patients coming into emergency rooms would give these companies an instant lift.
The Investing Answer: There is so much uncertainty regarding healthcare that it pays to research the various sub-sectors now and get ready to move once the Supreme Court's decision is announced. Stocks that have been sold off in anticipation of a reversal of Obamacare could see quick gains if the justices decide in favor of the legislation.
The original article can be found here.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.