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Top court’s PPACA ruling could shake hospitals, insurers

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(Bloomberg) — U.S. hospital companies and health insurers face the highest corporate stakes when the Supreme Court hears arguments Wednesday to decide the fate of a major part of the Patient Protection and Affordable Care Act (PPACA) health insurance premium subsidy program. 

Since the law’s 2010 signing, shares of HCA Holdings Inc. (NYSE:HCA), Tenet Healthcare Corp. (NYSE:THC) have more than doubled. The law has also benefited health insurers, with Anthem Inc. (NYSE:ANTM) and UnitedHealth Group Inc. (NYSE:UNH) trading near all-time highs.

See also: 10 states where the Supreme Court may help short-term health sales.

PPACA could provide about $22 billion in credits help people buy insurance this year, according to the Congressional Budget Office. So far, 11.4 million Americans have signed up for 2015 coverage, giving insurers and hospitals more paying customers and cutting the number who show up in the emergency room to get care without paying.

The case now before the Supreme Court, King vs. Burwell (Case Number 14-114), hinges on differences in the text in the provisions of PPACA that created the state-based exchange system and let the U.S. Department of Health and Human Services (HHS) provide exchange services in states in which the states were unable or unwilling to establish exchanges.

The Obama administration says PPACA lets the public health insurance exchange set up by HHS offer consumers premium tax credits. The tax credits help about 75 to 80 percent of exchange users pay for their coverage.

PPACA opponents say only exchanges established by states can offer the subsidies.

The justices may not issue a decision until late June.

See also: King vs. Burwell: Not the only PPACA court game around.

A ruling against the Obama administtration could raise insurance premiums for 7.5 million Americans, according to an estimate by Avalere Health, a consulting firm. Many would drop their insurance plans, and when they got sick, they’d still go to the hospital.

“You’re going back to charity care,” said Ana Gupte, a hospital and health insurance analyst at Leerink Partners.

Without insurance subsidies, Gupte estimates adjusted earnings growth across a group of hospitals would slow in 2016, to 4 percent from 7 percent. Since the Supreme Court agreed to hear the case on Nov. 7, Tenet has declined 8.1 percent as of Tuesday’s close, the most among 56 stocks in the Standard & Poor’s 500 Health Care Index.

States at risk

Publicly traded hospitals are concentrated in states such as Florida and Texas that use U.S.-run exchanges at the center of the case. HCA, the biggest for-profit U.S. hospital chain, generated 46 percent of its revenue in those two states last year, according to company filings. Tenet has about a quarter of its hospital beds in Texas and 17 percent in Florida.

Hedge funds have cut their exposure to hospital companies ahead of the ruling, according to a report by Bloomberg Intelligence. During the fourth quarter, funds cut stakes in Community Health (NYSE:CYH) by 4.9 percentage points and in LifePoint Hospitals Inc. (Nasdaq:LPNT) by 3.6 percentage points.

“As we have said before, we are in favor of actions that improve access to care and provide more people quality health insurance,” Ed Fishbough, an HCA spokesman, said by e-mail. Donn Walker, a spokesman for Tenet, declined to comment, and Community Health didn’t respond to a request for comment.

Health insurers

Health insurers’ stocks have performed better than the hospitals and some are near all-time highs. Cigna Corp. (NYSE:CI) has rallied 20 percent and Aetna Inc. (NYSE:AET) has gained 18 percent since the court took the case.

Gupte says insurers are less vulnerable than hospitals, in part because they’re less reliant on customers who purchase the subsidized coverage. Humana Inc. (NYSE:HUM) will get about 2 percent of its 2015 earnings from customers on federal exchanges, and most other large insurers will get 1 percent or less.

The industry has still fought a ruling against the law. Clare Krusing, a spokeswoman for trade group America’s Health Insurance Plans (AHIP), said loss of the subsidies would create instability. In a brief submitted to the court, the group said losing subsidies would create a “death spiral” where insurers raise premiums and all but the sickest stop buying coverage.

See also: King vs. Burwell: 5 PPACA patch ideas.

A group of Republican senators has proposed providing subsidies for a transitional period, which could limit the initial impact on hospitals, according to Brian Wright, an analyst at Sterne, Agee & Leach. States could also find fixes.

The Obama administration has said there’s no backup plan if the court knocks down the subsidies.

“Hospitals will incur significant financial harm if subsidies suddenly disappear,” according to a court brief on the case from hospital groups. A decline in insured patients “could imperil some hospitals, and will make it more difficult for others to carry out their missions.”