The Affordable Care Act (ACA) aka ObamaCare was issued a much-needed reprieve by Supreme Court Justice Anthony Kennedy recently. His opinion is especially important, since he is regarded as a swing vote on many key rulings. At stake is the issue of whether state subsidies can be deemed invalid; Justice Kennedy is of the opinion that the Affordable Care Act which is law, will be unable to function if the challenge is upheld. While a final decision is not expected until June 2015, the expressed opinion has had an immediate impact on the healthcare sector, notably healthcare stocks.
These stocks rallied on Wednesday March 4th on the back of purported ‘Get Well’ sentiment from the Supreme Court Justice. As it stands, an estimated 11.4 million people enrolled in Marketplaces during 2015, and 87% of those enrolees are receiving cost assistance. The number of people who paid their first month’s premium is listed as 6.5 to 7 million people at most. By the end of 2014, 15 million Americans were covered by health insurance. According to government stats, only 13.4% of U.S. adults are now uninsured. HCA Holdings Incorporated led the Bull Run on Wednesday 4 March 2015 as the news broke. Such was the dramatic movement in the market, that hospital stocks outperformed all other sectors on the S&P 500 Index.
The Affordable Care Act Greenlights Healthcare Sector Success
Since the law was enacted in 2010, it is these very healthcare companies and U.S. hospital companies that have benefited immeasurably. Stocks of top performing healthcare companies are at all-time highs and the ruling has injected further momentum to the trend. Among the best performing healthcare stocks are UnitedHealth Group Incorporated (NYSE:UNH), Anthem Inc (NYSE:ANTM), HCA Holdings Inc (NYSE:HCA), and Tenet Healthcare Corporation (NYSE:THC). During 2015, the ACA is expected to dole out $22 billion in healthcare credits to assist people to purchase insurance.
Hospitals benefit financially by having more insured patients coming into their Emergency Rooms for treatment. In the unlikely event that the Supreme Court rules against the state subsidies, many people will forego their insurance plans and opt to visit the ER when they are taken ill. For healthcare companies, this is perceived as a worst-case scenario, but as it stands they are likely to see increased growth and more insured patients the longer the ACA is in operation. Based on current projections, profits from hospitals are likely to enjoy earnings growth in the region of 7% in 2016, but this would be slashed in half should a ruling go against insurance subsidies.
The Case of HCA Holdings Incorporated
It is clear that HCA Holdings Incorporated has enjoyed strong growth since the passage of the Affordable Care Act (ACA) in 2010. The stock is currently trading at $75.15 per share, with a 52 week high of $77.08 and a 52 week low of $47.17 per share. The market capitalization of the company is $31.59 billion with a one-year stock price target of $85.14. The price/earnings (PE) ratio is 18.05, and the earnings per share (EPS) figure is listed as $4.16. HCA is the leading for-profit U.S. hospital. It generated almost 50% of its company profits from its Texas and Florida hospitals during 2014.
Besides for HCA Holdings Inc the other beneficiaries of the ACA include insurers like Aetna (NYSE:AET) Incorporated and Cigna Corporation (NYSE:CI). However there is a mood of caution from hedge fund managers as they have been cutting their clients’ exposure to hospital stocks in 2014 and 2015. LifePoint Hospitals Incorporated has seen declines of 3.6% while Community Health stocks have seen declines of 4.9% from hedge funds. The fact of the matter is that hospitals stand to lose the most if the court rules against the subsidies. Patients will enjoy emergency room services regardless and the uninsured will still have access to emergency medical care at zero cost if they so desire.