Court ruling would lift cloud of uncertainty

If the U.S. Supreme Court rules on President Obama’s health reform law in the way investors expect, it could provide a gradual boost to health care stocks as investors re-embrace the sector as a hedge against a world economy with a rocky future.

Whether the court's decision will actually help or hurt profits of health care companies is anyone’s guess.

The Supreme Court did not hand down its ruling Monday morning during the latest meeting of its nine justices. Their next meeting is set for Thursday, but most observers expect the health reform decision to come June 25 or 28.

The outcome could take several routes, but most investors and attorneys expect the court to strike down the law’s requirement that all Americans have health insurance coverage and, along with it, the requirement that health insurers accept all applicants regardless of pre-existing conditions. Most observers expect the court to let stand the rest of the law, called the Patient Protection & Affordable Care Act.

Still, there are many other possible outcomes:

• The court could take a pass on the case, declaring that it cannot be challenged until the provisions in question actually take effect, which won’t occur until 2014. However, most legal experts consider this possibility remote at best.
• The court could uphold the entire law as constitutional. This is regarded as a likely, but not the most likely, outcome.
• The court could find the “individual mandate” to have health insurance unconstitutional and nullify the entire law. One lower federal court ruled this way, but none of the others to consider the case followed suit. It is still regarded as an “dark horse” outcome.
• The court could find the law’s large expansion of the federal-state Medicaid program to be unconstitutional, and nullify the entire law.
• The court could find either the individual mandate or the Medicaid expansion to be unconstitutional and strike one or both of those provisions, leaving the rest of the law intact.

Greg Pemberton, a health care attorney at Indianapolis law firm Ice Miller LLP, places the odds at 50-50 that the court will uphold the entire law or strike down the individual mandate. He does not expect the Medicaid expansion to be ruled unconstitutional.

“Whether the mandate is supported or not, is a coin toss. It’s close enough that it could go either way,” Pemberton said.

If the court strikes down the individual mandate, he said it most likely also would remove provisions closely linked to it, such as forcing health insurers to take all comers, restrictions on the range of prices insurers can charge to customers of different health status, and the requirement that employers provide insurance.

“It would be surgical [revisions] rather than comprehensive,” he said. “They would strike complementary policies that are really hand in glove with the mandate.”

Whatever the ruling, having clarity will cause more money to flow into health care stocks, therefore lifting overall values, said Les Funtleyder, a Wall Street portfolio manager and author of the 2009 book "Health Care Investing."

“You should expect multiples to expand once this is resolved,” he said, adding that he thinks the court’s ruling will be the word because the prospects for a repeal of the law, even after a potential Republican victory in the November elections, are slim.

Of course, not everyone agrees with Funtleyder. Ending the so-called “individual mandate” likely would mean that fewer Americans actually buy health insurance. That means fewer customers for Indianapolis-based WellPoint Inc. and its peers. And it also means fewer paying customers for drugmakers like Indianapolis-based Eli Lilly and Co. and not-for-profit hospitals that treat large numbers of uninsured patients, such as Indiana University Health.

"The number of uninsured Americans will remain high and result in continued growth in uncompensated care,” hospital bond analysts at Moody’s Investors Service wrote in a report last week on not-for-profit hospitals. They view the loss of the individual mandate as a “credit negative” for the hospitals.

Funtleyder, however, notes that the health reform law also raises various taxes to pay for an expansion of the federal-state Medicaid program and to help low- and middle-income Americans purchase health insurance.

The court did consider whether the Medicaid expansion is unconstitutional, but most investors expect that provision to stand. And if the court does not strike down the entire law, the subsidies would also stand. Those would still bring health insurers, hospitals and drugmakers a wave of new customers, Funtleyder noted.

In the absence of an individual mandate, the people most likely not to buy health insurance would be those that are healthy—who aren’t bringing much business to hospitals and drugmakers, anyway.

Their absence would, however, deprive health insurers of extra premiums, which likely would force them to raise premiums on everyone else. So the elimination of the individual mandate could accelerate the crushing costs that are the real driver of change in the health care industry.

“Whatever happens to the law, those problems are still with us,” Funtleyder said. His advice to his clients: “Invest on the side of the angels: the companies who innovate, the companies who actually control costs.”

Still, that’s not fool-proof, either. The health reform law pays for some of its spending with a 2.3-percent tax on makers of medical devices. Such companies as Bloomington-based Cook Medical Inc. and Warsaw-based Zimmer Holdings Inc. sell products directly to hospitals and doctors, not to consumers. So the tax would sap their profits while the growth in paying customers would bring them no benefit.

They are one part of the health industry rooting for the entire law to fall.