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How to Trade on Obamacare Ruling

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MINYANVILLE ORIGINAL Whatever the Supreme Court says about President Obama’s health care reform law, expect very heavy trading of managed care, hospital, and other stocks.

Health insurance, hospital, and medical device companies are almost certain to rally or fall once the high court’s decision is made public. Investor sentiment toward big drug makers is a little less clear. The reform law contains some benefits for those companies and yet they are far less affected than other areas of health care.

The court’s decision is expected Thursday morning and there are a number of possible scenarios. For the sake of simplicity, consider that the law may be upheld or overturned entirely, or a part of the legislation that mandates individuals buy health insurance may be ruled unconstitutional. (For more background on the legal arguments, click here.)

The so-called individual mandate, which helps fund the provisions of the law, is at the heart of the court battle. Did Congress have the constitutional backing to require everyone to buy health insurance? If the mandate is struck down, that could be a negative for hospitals, which provide a lot of free care for people who walk into their emergency rooms without insurance. The law also had other provisions that help hospitals, including the expansion of Medicaid. If the individual mandate or the entire law is struck down, expect hospital stocks such as HCA Holdings (HCA), Tenet Healthcare (THC), and Community Health Systems (CYH) to fall. On the other hand, the stocks are likely to rally if the law is upheld.

Insurance companies such as UnitedHealth Group (UNH), WellPoint (WLP), and Aetna (AET) have much at stake. If the entire law is thrown out by the court, the managed health care companies would largely turn the clock back to before Obamacare was even being debated. While insurers say they would keep some policies of the act even if it is overturned, the most significant requirements of the law include guarantees that all Americans can buy insurance and that their pre-existing conditions shouldn’t affect the price of a policy. If those two requirements are upheld but the individual mandate is thrown out, that may be problematic for the insurers. If everyone is required to buy insurance, the cost of policies are spread across a larger base. Insurers don’t like the law, overall, because of the edicts on guaranteeing health coverage. If the law is upheld, expect managed care stocks to drop.

“Managed care looks to us like the health care sector most likely to be volatile around the court rulings,” Leerink Swann analysts say in recent report. However, if Obamacare “is struck down in entirety, managed care is the greatest health care stock group beneficiary.”  

Health reform was largely viewed as a negative for medical device makers such Medtronic (MDT), St. Jude Medical (STJ), Edwards Lifesciences (EW), and Boston Scientific (BSX) as they incurred new government fees aimed at helping pay for covering the uninsured. What’s more, there was little benefit from the law for these companies. If the law is vacated by the court, these stocks should rise.

Finally, big pharmaceutical makers had a seat at the negotiating table throughout the Obamacare debate and the law was seen as actually helping provide drug insurance coverage to more people. Former Pfizer (PFE) chief Jeffrey Kindler and other big drug execs supported Obama’s reform as long as it was seen as friendly to the pharma industry. That said, drug stocks may rise initially if reform is overturned as some investors view a repeal of the law as positive for all health care stocks. However, overturning the law isn’t a clear-cut positive for the pharma companies.

Twitter: @brettchase

POSITION:  No positions in stocks mentioned.