Supreme Court's Affordable Care Act Decision Might Prove A Buying Opportunity
Morningstar analysts say that investors should not worry about the court's impending decision.
Should investors be worried about King v. Burwell, the case in which the Supreme Court could decide to invalidate a major provision of the Affordable Care Act? Probably not. Morningstar's analysts say the court's decision will likely be a nonevent--and might even produce a buying opportunity for long-term investors.
First, what is at stake? King v. Burwell pertains to the federally run exchange on which some individuals have purchased health insurance to meet the ACA's individual mandate. Although many states established their own insurance exchanges, others elected to rely upon the federal government's exchange, HealthCare.gov. At issue in the court case is a phrase in the legislation indicating that subsidies are available to those who bought their insurance on "an Exchange established by the State." The plaintiffs claim that language precludes the payment of subsidies to individuals using the federal exchange. If they prevail, subsidies might at least temporarily be unavailable for individuals in the 37 states using HealthCare.gov.
Removal of the Obamacare subsidies therefore could affect a lot of people. The White House estimates that about 8.8 million people have signed up for health-insurance coverage on the federal exchange. According to the Department of Health and Human Services, about 87% of people using the federal exchange have received a subsidy for their health-insurance premiums, averaging $268 per month.
Some proponents of the ACA fear that an adverse Supreme Court decision would prompt a "death spiral" for the federal exchange, in which many people would be unable to afford their insurance or would simply balk at paying higher premiums. Relatively healthy people would be particularly likely to drop unsubsidized coverage, leaving a sicker pool of insured individuals. This would likely prompt significant premium hikes, which in turn would induce additional people to drop insurance. At the end of this process, ACA proponents fear, the federal exchange would provide coverage for a relatively small number of individuals in poor health.
Morningstar's director of health-care equity research, Damien Conover, says that although some individuals might be harmed by a court decision to eliminate subsidies on federal exchanges, in most cases there would be no material impact for investors. Conover contends that even if the government did nothing to assist people who lose access to subsidies, most drug companies such as Pfizer (PFE) and Merck (MRK), for example, would suffer losses of less than 1% of their revenue.
Morningstar senior equity analyst Vishnu Lekraj, who covers health insurers like Anthem (ANTM) and UnitedHealth Group (UNH), says that the Supreme Court decision should not have a big impact on insurers, either. Lekraj notes that for UnitedHealth and Anthem, "the exchange business represents a very small portion of membership, revenue, and profits." He says that a loss of ACA-related business would affect insurers' prospective growth rates, but that he would consider the valuation impact "minimal."
The potential effect on valuations might seem somewhat larger for the for-profit hospital companies, including HCA Holdings (HCA) and Tenet Healthcare (THC). Michael Waterhouse, a Morningstar equity analyst who covers hospitals and other health-industry companies, says that HCA and Tenet earn a disproportionate share of their revenue from Republican-controlled states--including Florida and Texas--that are unlikely to set up the state-run exchanges that would allow their residents to continue receiving federal subsidies. That is important because before enactment of the ACA, hospitals provided a somewhat greater amount of uncompensated care--essentially government-mandated care for people who lack health insurance.
But even for the hospitals, Waterhouse says that the King v. Burwell decision is unlikely to meaningfully affect his fair value estimates. At HCA, for example, Waterhouse says that exchange patients account for just 2% of admissions--and 60% of those people bought insurance even before the ACA's individual mandate came into effect. Many of them presumably would continue to buy insurance even in the absence of the exchange credits.
Waterhouse says that a previous Supreme Court case, 2012's National Federation of Independent Business v. Sebelius, was much more consequential for hospital companies. That case allowed states to opt out of the ACA's Medicaid expansion. As one might expect, the relatively poor people who would have qualified for Medicaid account for a disproportionate number of uncompensated health services. Therefore, the Supreme Court's NFIB v. Sebelius decision--already priced into the market--cost hospital companies more money than would an adverse decision in King v. Burwell.
Lekraj also says that even if the Supreme Court rules for the plaintiffs, he believes that states could act reasonably quickly to establish a "workaround" that would allow them to meet the technical definition of a "state" exchange while still relying heavily on the federal government's technology infrastructure.
Given that the likely consequences of an adverse Supreme Court ruling are smaller than many observers believe, such an outcome might even generate a buying opportunity. For example, Lekraj says that managed-care organizations such as UnitedHealth "tend to move disproportionately on headline news, so I would expect a downside stock move if there were a negative Supreme Court ruling." Morningstar considers many health-care stocks to be overvalued at the moment, but investors may wish to keep an eye on companies like Pfizer and Anthem, which are currently moderately valued but could become attractive in the event of a Supreme Court-related sell-off.
Scott Cooley does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.