Health Stocks Fall as Obamacare Ruling Jolts Investors
(Bloomberg) -- A ruling by a federal judge in Texas that the Obamacare law is invalid sent shock waves through the health-care industry as hospitals and managed-care stocks sank and high-yield spreads widened Monday.
A judge sided with Texas late Friday in a lawsuit alleging that Congress’s decision in 2017 to kill a related tax penalty essentially voided the entire Affordable Care Act. While many analysts expect the ruling to be reversed by higher courts, the news adds to volatility in a sector that had barely recovered from political overhangs this year. Health-care overall remains the top performing sector in the S&P 500 year-to-date.
U.S. hospitals, which are most at risk from the latest ruling, fell 5.7 percent to the lowest since January 10, according to a Bloomberg Intelligence index. Community Health Systems lost almost 14 percent, while Tenet Healthcare fell 6.8 percent and HCA Healthcare slid 2.9 percent. Tenet was also downgraded by Baird after the ruling.
The index had been up 26 percent this year through December 3. Monday’s sell-off wiped out gains for 2018.
The ACA ruling is “a buying opportunity” for HCA as well as large diversified managed-care companies and WellCare Health Plans, Leerink analyst Ana Gupte wrote in a note. “We see the decision of Judge Reed O’Connor as likely to be overturned by the Fifth Circuit Court of Appeals in 2019, and most likely by the Supreme Court in 2020.”
Debt investors were also weary of the political uncertainty that was created after the judge’s decision. Tenet and Community Health’s bonds were among the top decliners in the high-yield market on Monday, according to Trace bond trading data. Tenet’s 6.75 percent and 7 percent senior unsecured notes due 2025 and 2022 slipped 2 cents on the dollar to 94.75 and 94.25 respectively, according to Trace.
Across publicly traded hospitals, earnings exposure to the health-care law is as much as 10 percent, Gupte points out. She cautioned that facilities could see a drop in patient volumes and a rise in unpaid bills if people lose their health insurance.
Centene and Molina are bearing the brunt of the sell-off in managed care, given their exposure to Medicaid and Obamacare markets, also known as the public exchanges. Both companies have a total ACA exposure of more than 40 percent of EPS, followed by WellCare at 10 percent, JPMorgan analyst Gary Taylor reminded investors in an email late Friday.
The S&P 500 Managed Care Index dropped 2.5 percent to the lowest since August 2, led by Centene, Cigna, Anthem and UnitedHealth. Molina plunged 8.9 percent, the most since February 2017.
“We like the large commercial/Medicare names as the best way to play the uncertainty given relatively limited ACA exposure,” Cowen analyst Charles Rhyee wrote in a note.
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