A ruling by a federal judge in Texas that the Patient Protection and Affordable Care Act – the main part of the “Obamacare law” — is invalid rocked health care industry investors Monday.
Hospitals and managed care stocks sank, and high-bond yield spreads widened.
A group of states led by Texas has alleged in a lawsuit that Congress’s decision in 2017 to set the Affordable Care Act individual mandate penalty at zero voided PPACA. PPACA is one of the two laws in the ACA statutory package. The other is the Health Care and Education Reconciliation Act.
The federal judge sided with the states that brought Friday.
While many analysts expect the ruling to be reversed by higher courts, the news adds to volatility in a sector that had barely recovered from political overhangs this year. Health care overall remains the top performing sector in the S&P 500 year-to-date.
U.S. hospitals, which are most at risk from the latest ruling, fell 5.7%, to the lowest level since Jan. 10, according to a Bloomberg Intelligence index. Community Health Systems lost almost 14%, while Tenet Healthcare fell 6.8% and HCA Healthcare slid 2.9%. Tenet was also downgraded by Baird after the ruling.
The index had been up 26% this year through Dec. 3. Monday’s sell-off wiped out gains for 2018.
The ACA ruling is “a buying opportunity” for HCA as well as large diversified managed-care companies and WellCare Health Plans, Leerink analyst Ana Gupte wrote in a note. “We see the decision of Judge Reed O’Connor as likely to be overturned by the Fifth Circuit Court of Appeals in 2019, and most likely by the Supreme Court in 2020.”
Debt investors were also wary of the political uncertainty that was created after the judge’s decision. Tenet and Community Health’s bonds were among the top decliners in the high-yield market on Monday, according to Trace bond trading data. Tenet’s 6.75% and 7% senior unsecured notes due 2025 and 2022 slipped 2 cents on the dollar to 94.75 and 94.25 respectively, according to Trace.
Across publicly traded hospitals, earnings exposure to the health care law is as much as 10%, Gupte points out. She cautioned that facilities could see a drop in patient volumes and a rise in unpaid bills if people lose their health insurance.
Centene and Molina are bearing the brunt of the sell-off in managed care, given their exposure to Medicaid and ACA public exchange system market. Both companies have a total ACA exposure of more than 40% of earnings per share, followed by WellCare at 10%, JPMorgan analyst Gary Taylor reminded investors in an email late Friday.
The S&P 500 Managed Care Index dropped 2.5% to the lowest since Aug. 2, led by Centene, Cigna, Anthem and UnitedHealth. Molina plunged 8.9%, the most since February 2017.
Here’s what happened to the share prices of Anthem, Cigna, CVS (which recently bought Aetna), Humana and UnitedHealth:
- Anthem: Down 3.23%
- Cigna: Down 3.24%
- CVS: Down 1.68%
- Humana: Up 1.06%
- UnitedHealth: Down 2.62%
- S&P 500: Down 2.08%
“We like the large commercial/Medicare names as the best way to play the uncertainty given relatively limited ACA exposure,” Cowen analyst Charles Rhyee wrote in a note.
—With assistance from Katherine Doherty and additional information contributed by Allison Bell.
— Read Texas Judge Throws Out Most of ACA, on ThinkAdvisor.