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Supreme skepticism boosts WellPoint stock

April 2, 2012
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However the U.S. Supreme Court ends up ruling on President Obama’s health reform law, WellPoint Inc. and its health insurance peers already owe a big thank you to the nation’s top justices.

Indianapolis-based WellPoint’s stock price shot up nearly 11 percent last week—and its peers weren’t far behind. That’s because investors, like most observers, didn’t expect such harsh questioning of the law from even perceived “swing“ votes on the court, such as Chief Justice John Roberts and Justice Anthony Kennedy.

"Going into the debate on the mandate, there was almost a sense of complacency out there that the mandate would stand, as would the law," CRT Capital analyst Sheryl Skolnick told the Reuters news service. "Investors were thrown a curve ball."

The favorable reaction from Wall Street came not only because harsh questioning by the court’s conservative justices put in doubt the law’s “individual mandate” that all Americans buy health insurance, but also because the justices raised the possibility that they would strike down requirements that insurers accept all customers, regardless if they are already sick or not.

The Obama administration itself argued that the justices, if they decide that the individual mandate is unconstitutional, also should eliminate the law’s requirements that health insurers accept all patients and another provision that says insurers must base all customers’ premiums on the health of the entire “community” in which that person lives, not on his or her individual health status.

The group of 26 states—including Indiana—that filed the lawsuit challenging the health reform law pushed the justices further, saying that if the individual mandate falls, the entire law should be thrown out with it.

From investors’ standpoint, either result would be better for health insurers than the worst-case scenario they feared: that the individual mandate would be struck down while the other requirements would stand.

That outcome would have prevented WellPoint and its peers from gaining some 30 million new customers, while still leaving them on the hook to pay the bills of patients who waited until they were sick to start paying premiums—premiums that would be restricted in price by the overall health of the community.

The stock prices of WellPoint’s main competitors—Hartford-based Aetna Inc., Philadelphia-based Cigna Corp., Louisville-based Humana Inc., and Minnesota-based UnitedHealth Group—each saw their stock prices rise between 7 percent and 10 percent last week.

"People at this point have pretty much dismissed the potential for an adverse outcome here, which would be the individual mandate gets tossed and everything else remains the same," Susquehanna Financial Group analyst Chris Rigg told Reuters.

That’s the current sentiment, but it is far from certain, Indianapolis health care attorneys Greg Pemberton and Taryn Stone noted in written commentary about last week’s hearings on the Patient Protection and Affordable Care Act.

“Ultimately, the challenge to the severability of the individual mandate provision from the rest of the Act is fundamentally a question of congressional intent. Would Congress have intended the entire Act to fall if the individual mandate is found unconstitutional?” wrote Pemberton and Stone, who are part of the law firm Ice Miller LLP. They concluded, “At this point, there is no clear indication on how the Court will rule.”

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