The equity markets responded to the surprising level of clarity in the Supreme Court decision on the Obama administration's health care legislation Thursday, sending hospital stocks up and HMO shares down immediately after the announcement.
“We are seeing a definite reaction and what's limiting the downside in HMOs is the clarity that all of the health care legislation was upheld by the court,” said Jeffrey Kleintop, chief market strategies at LPL Financial LLC.
He pointed out that hospital stocks were up by about 9% shortly after the court's ruling was announced Thursday morning. Hospitals, along with pharmaceutical companies, are seen as big beneficiaries of having more customers covered by insurance.
Meanwhile, health insurance companies, which will also benefit from having more customers but also will have their profits capped under the new law, saw stock prices across the industry fall by about 3%.
Leading up to the much-anticipated ruling, most market watchers were expecting at least parts of the health care legislation to be struck down by the court. One of the stickier issues was the constitutionality of requiring private citizens to buy health insurance.
But with no single piece of the legislation being pulled out, the health care industry is essentially back to where it was shortly after the law was signed in 2010.
“We're viewing this [ruling] as largely favorable because many of the health care subindustries will benefit,” said Todd Rosenbluth, an exchange-traded-fund analyst at S&P Capital IQ.
He is particularly bullish on pharmaceutical stocks, which represent half of the health care sector in the S&P 500.
“Upholding the legislation is a positive because it continues the planned extension of health care coverage to 30 million more people,” Mr. Rosenbluth said.
Some of the leaders in the pharmaceutical space are Johnson & Johnson Ticker:(JNJ), Merck & Co. Inc. Ticker:(MRK) and Pfizer Inc. Ticker:(PHE).
The second-largest category within the health care sector, health care equipment companies, presents more of a mixed message under the new law, Mr. Rosenbluth said.
“The health care equipment companies will benefit from more people being insured, but that law does impose a special tax on all medical equipment sold in the U.S.,” he said. “That tax is a bit of an offset to the bigger pool of customers.”
Investors can gain exposure to the entire health care sector through the Health Care Select Sector SPDR ETF Ticker:(XLV).
With opposition to the law having been shot down by the Supreme Court, and despite claims by Republican presidential candidate Mitt Romney that he will repeal it if elected, the law has gained some real strength with the court's ruling.
“While it is possible that the battle over the fate of the health care law will now shift to the legislature, given the low probability of Republicans gaining a filibuster-proof majority in the Senate, we now believe the law isn't likely to be repealed,” said Alex Morozov, an analyst at Morningstar Inc.
He called the ruling favorable to the managed-care sector, pharmaceutical companies, and such as hospitals.
In line with Mr. Rosenbluth, Mr. Morozov believes medical device manufacturers are “relative losers” from the legislation.
“We anticipate the additional insureds in 2014 will not significantly contribute to volume because many devices are concentrated among Medicare recipients,” he said. “For example, an estimated 90% to 95% of pacemakers in the U.S. are implanted in Medicare patients.”
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