The much-awaited Supreme Court ruling in favor of the ObamaCare subsides case has removed a cloud of uncertainty that was cast so long over the health care insurance sector.
Yesterday, the U.S. Supreme Court’s 6-3 decision upheld the subsidies that were given to those enrolled via the federal exchanges. The case referred to as SCOTUS pointed to the text of the law which stated that only those individuals insured under state-established exchanges would be eligible for federal subsidies.
However, customers who enrolled via 34 states that did not set up their own exchanges also got the subsidies. The case challenged the legibility of these subsidies.
The ruling in the case established that the subsidies that were given will stay and customers will continue to receive subsidies even if they buy insurance on state exchanges.
The decision is a net positive for health insurers who would have faced an outflux of members had the subsidies been scrapped. The removal of the subsidies would have caused a "death spiral" as healthier people would then have less incentive to participate in the market.
Keeping the subsidies intact will make insurance more affordable for both groups of people, healthy or sick. This combination will improve the customer profile of health insurers enabling them to dilute the risk among a larger pool of members, thus reducing their claim cost.
While being accretive to the top line of the health insurers, the ruling will save the bottom line of the hospitals in the form of reduction in bad debts. The Hospitals and Emergency Services sector will now get to serve millions of insured patients, thus saving the huge amount of money required to set aside as provision for bad debts. Over the past two years, hospitals have saved millions of dollars of bad debt because of a higher number of insured patients courtesy of the health care reform act.
The sector was jittery in the run up to the final outcome of the case, since doing away with the subsidies would have thrust upon them increased unpaid bills. On the other hand, an increase in patients carrying health insurance will increase the use medical services, thus creating demand for hospital and emergency services.
Shares Spike
The news sent the shares of health insurers Aetna Inc. AET, UnitedHealth Group Inc. UNH, Cigna Corp. CI and Humana Inc. HUM soaring 3.9%, 2.3%, 2.2% and 7.1% respectively. Humana, however, outshone its rival since its stock also got a boost from the news of its acquisition by Aetna.
The stocks of hospitals saw higher gains. HCA Holdings Inc. HCA, Tenet Healthcare Corp. THC, Universal Health Services Inc. UHS and LifePoint Health, Inc. LPNT gained 8.82%, 12.24%, 7.73%, 7.6%, respectively, on the news.
Our Pick
The removal of a major hurdle has made the health care sector a clear investment opportunity. We pick three stocks with an attractive Zacks Rank, which are poised to gain from the recent development.
Our first pick would be Tenet Healthcare Corp. with a Zacks Rank #2 (Buy). Tenet Healthcare has consistently been seen growth in operating revenues. Also, acquisitions and opening of outpatient centers, along with planned investments, are expected to increase profitability over time.
Moreover, the concentration of the company’s operations in California, Florida and Texas – which historically have higher percentages of uninsured and underinsured patients – gives it a competitive advantage from extended insurance coverage.
Tenet Healthcare carries an expected long-term growth rate of 11%.
We would also recommend Universal Health Services Inc. carrying a Zacks Rank #2. It is one of the premier hospital management companies in the United States. The company’s revenues have been increasing over the past several quarters and management’s strategy of growth via organic and inorganic means is likely to remain in place.
Universal Health Services’ expected long-term growth rate is 9.4%.
Another buy would be UnitedHealth Group Inc. again with a Zacks Rank #2. This health insurer is expanding its presence in online exchanges to 24 states which will equip it to insure more members. The company is a solid player in the health insurance industry with a massive diversified business.
It is also contemplating on acquiring Aetna, which would place the company among the biggest players in the global health care market. We thus believe that the stock offers a compelling investment opportunity.
UnitedHealth’s expected long-term growth rate is 10.5%.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment