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Hospital shares up on health ruling, insurers down

NEW YORK (Reuters) – Shares of hospital chains jumped, while large health insurer stocks fell on Thursday after the U.S. Supreme Court upheld the centerpiece of U.S. President Barack Obama’s signature healthcare law.

In a 5-4 decision, the court backed the component of the law that requires that most Americans buy insurance by 2014 or pay a financial penalty. The 2010 law aims to broaden coverage to more than 30 million uninsured Americans, through state-based insurance exchanges where people can shop for coverage and through an expansion of the Medicaid program for low-income Americans.

Widening the pool of paying patients stands to benefit hospital companies, which are often left to cover the high medical bills of the sick who have no coverage.

“For hospitals, this is a huge win,” said Michael Wiederhorn, an analyst with Oppenheimer & Co. “In the short and the long term, it will reduce bad debt.”

Shares of HCA Holdings Inc and Community Health Systems Inc, the two largest hospital companies, each rose sharply. HCA was up 8.8% at $28.95 and Community Health Systems was up 9.3% to $27.87 around midday.

“It’s good for us,” said Alan Miller, chief executive of Universal Health Services Inc, which runs acute and mental health hospitals. “You’ve got a lot of people now who are going to be covered and they’re going to pay their bills, or the federal government or the state or somebody is going to pay their bills.”

Shares of large, diversified health insurers such as Aetna Inc and WellPoint Inc were off about 4% and 6%, respectively. Investors might have viewed overturning the law as a better outcome for the companies, Goldman Sachs analysts said, leading to the selling pressure.

Under the law, insurers face government review of premium rate increases, new requirements for spending on medical care and fees on the sector starting in 2014. But the companies also stand to see increased volume of customers as more Americans become insured.

“We think this is the best outcome for health insurers, not that you’d know that from the stock reaction,” said Morningstar analyst Matthew Coffina. “There’s a perception in the marketplace that (the law) is bad for insurers. We don’t think that’s the case.”

STATES GIVEN REINS ON MEDICAID EXPANSION

Shares of insurers that specialize in Medicaid plans jumped, with Amerigroup Corp climbing 5.2% to $65.63, and Molina Healthcare Inc up 3.5% at $22.06.

The court did strike down the provision of the law that requires the states to dramatically expand the Medicaid health insurance program for the poor.

Goldman Sachs called the ruling “net positive” for the Medicaid stocks because the coverage expansion survives, “even though the Court apparently has given states the ability to ‘opt out’ of the expansion.”

“It didn’t hurt Medicaid HMOs because people aren’t worried about a bunch of states refusing Medicaid money,” said Robert Laszewski, who consults for health insurers as president of Health Policy and Strategy Associates. “Maybe one state turns it down.”

Healthcare investors had been eagerly anticipating the ruling on the law, which heaps new regulations – some small, some sweeping – on virtually every industry.

While some investors devised complex options strategies to play the decision, the more risk-averse were wary of buying ahead of the event, and instead waited for more certainty on the regulatory landscape before choosing where to invest.

“This gives us clarity, which is what markets needed,” said Todd Schoenberger, managing principal at the Blackbay Group.

Shares of five different healthcare companies were temporarily halted, some more than once, after the ruling was announced, due to sharp moves. Those stocks were: Tenet Healthcare, WellPoint, Community Health, HCA and Health Management Associates Inc.

Before the court heard oral arguments about the law in late March, investors were generally assuming the legislation would be upheld. But the tone of questioning from the high court’s justices led investors and analysts to project it was more likely the Supreme Court would overturn the individual mandate.

A Jefferies & Co survey released last week of more than 100 investors found that 77% expected the law to be altered in a “material way,” such as striking down the mandate or overturning the whole law.