Hospital stocks rose sharply Thursday after the Supreme Court ruling on healthcare reform, while some insurance company stocks fell in choppy trading as investors fretted about the costs of rules included in the law.
Stocks of the largest drug companies in the country closed mixed. Stocks of medical device makers fell about the same amount as the broader market.
The decision should help hospitals by adding millions of people to the rolls of the insured, expanding the pool of health care consumers. But by the same reasoning, insurance companies will also gain millions of premium-paying customers. However, investors may expect that on balance, new regulations could hurt insurance industry profits.
Health care stocks were sharply divided following the ruling and wrapped up the day that way. Insurers Aetna and Cigna dropped 3%, while WellPoint dropped 8%. UnitedHealth Group, the biggest insurer, closed up half of a percentage point. UnitedHealth depends less on individual and small-group policies for its revenue. UnitedHealth also has an information technology business and a pharmacy benefits business and is the biggest provider of Medicare Advantage plans for the elderly.
The stock of Hospital Corp. of America, the largest private hospital chain in the United States, closed up 11%. Community Health Systems rose 8%, and Health Management Associates gained 9%.
Quest Diagnostics, which runs laboratories, and Laboratory Corp. of America both gained about 3%.
Because of the volatility around the time the decision was reported, trading was halted for five health care stocks, a spokeswoman for the New York Stock Exchange said: HCA, Community Health Systems, Tenet Healthcare, WellPoint and Health Management Associates. She said all five stocks returned to normal trading shortly after the halts. She would not say how many stocks are halted on a typical trading day. Under market rules, trading of a stock is halted for five minutes if its price swings more than 10% in a five-minute period.
Equities analysts at Goldman Sachs say hospitals are winners in the U.S. Supreme Court ruling on President Obama's health care plan. A commentary published by the firm predicts that the year 2014, when many provisions of the health care law are in place, should be a good one for hospital companies.
Equity analysts at other companies say the new law will make health insurance more widespread and that will cut the financial burden on hospitals from treating indigent patients.
Some analysts expressed surprise at the quick sell-off in insurance stocks. After all, those insurance companies will also gain millions of premium-paying customers.
Analysts with Jefferies, an investment bank, said in a note to clients that "after the dust settles, we are generally bullish" on big insurance companies because they will benefit from about 18 million new customers in 2014 and millions more after that.
Other stocks also were affected by the decision, as investors fear that health care costs could further cripple economic growth. The broader stock market was down about 1% for most of the day, but rallied late and closed only slightly lower. The Dow Jones industrial average, which was down about 100 points before the ruling came out at 10 a.m. EDT, was down 160 points after the ruling and closed down 25 points.
Some investors expressed concern that the so-called individual mandate requiring all Americans to purchase health insurance might act like an additional tax, giving consumers another reason to cut back on spending. There are also worries that businesses will be forced to spend more on health care and in turn will spend less on bigger-ticket items that power the U.S. and global economies.
Health insurance companies, major employers, and big hospital systems are among the best prepared. Many of the changes called for in the law were already being demanded by employers trying to get better value for their private health insurance dollars.
“The main driver here is financial," Dr. Toby Cosgrove, CEO of the Cleveland Clinic, which has pioneered some of the changes, told The Associated Press. “The factors driving health care reform are not new, and they are not going to go away.”
Despite how investors may feel about the legislation itself, they need to be aware of the winners and losers so they can position their portfolio accordingly, said David Sterman of StreetAuthority LLC.
According to Sterman, clear winners from this landmark ruling include hospitals, which no longer need to shoulder the burden of uninsured emergency room patients who can't pay their bills when they come due. (These hospitals will also benefit from an increase in higher-margin elective surgeries as more patients get coverage).
On the flip side, any companies that sell medical devices or pharmaceuticals are faced with a stark reality.
“Reimbursement pressures are rising and will get even more severe,” Sterman says. “A key goal of the health care overhaul is aimed at utilizing the lowest-cost treatment option, assuming outcomes are equal.”