Today is the third and final day the Supreme Court of the United States will hear arguments on the Affordable Care Act, President Obama’s signature law giving insurance to 32 million uninsured Americans.The law fell into considerable doubt yesterday after the court’s moderate justices offered a high dose of scepticism — health care stocks across the spectrum declined.
But in a note out today, Credit Suisse’s Ralph Giacobbe argues that most of the reform is misunderstood and that shares in domestic health care systems could still rise.
“In our view, three of the four potential scenarios stemming from the Supreme Court hearings will have positive earnings implications for the group, with the last scenario net neutral,” Giacobbe says. “Given the potential for upside to our numbers (and limited downside even in the event of no reform), we see the opportunity for multiple expansion off current depressed valuation levels.”
The four scenarios that are possible following the ruling include: the ACA is upheld, the individual mandate is ruled unconstitutional, Medicaid expansion is struck down, and the entire ACA is struck down.
Analysts have reached a consensus that under the first option, hospital owners like Community Health Systems and Universal Health Services, would benefit. Credit Suisse estimates under full phase-in relative to current estimates, earnings power would be boosted by 26.5 per cent, on average.
However, that number immediately begins to decline once parts of the law are dismantled. Below, a look at bottom line impact by hospital operator under the first three scenarios.
Photo: Credit Suisse
If only the individual mandate is repealed, Credit Suisse sees five million fewer Americans gaining coverage. If only medicaid is felled, 16 million fewer Americans would be insured.
These fewer insured Americans represent a huge group that would impact the revenue mix at operators like Tenet Healthcare.
“The root of the revenue opportunity is from the sizable difference in collectable revenue between the least profitable patients (uninsured) and the highest reimbursing patients (managed care),” Giacobbe says. “Any shift away from a previously uninsured payor should be a net positive for the hospitals, all else equal.”
Even though hospitals charge uninsured consumers full price for a procedure, collecting on those bills can be incredibly difficult. The Association of Credit and Collection Professionals estimates that hospitals had an average recovery rate of 10.3 per cent in 2010, which translated into $36.4 billion in uncompensated care in 2008.
Credit Suisse offered a simplified chart for actual collection between types of Americans.
Photo: Credit Suisse
Credit Suisse still sees positive impact from partial implementation of the Affordable Care Act as more Americans gain insurance and hospitals have fewer uninsured customers.
Other equity research desks have weighed in recently, with Goldman Sachs analysts publishing a note that showed any ruling other than finding the ACA constitutional would negatively impact the hospital sector.
“Among sub-sectors, hospital stocks could see the most upside on a ruling to uphold given the prospect of lower rates of uncompensated care (even though partly offset by lower Medicare rates). Conversely, we think healthcare stocks would trade lower on any ruling other than ‘uphold,’ with hospital stocks having the most downside.”
Along with the note, Goldman drew up sector-by-sector impact from the ruling.
Giacobbe agreed that there would be some pullback in the hospital sector if the ACA was repealed in full, although he did not think it would have impact on underlying financials.
“We acknowledge that the stocks would likely see some pressure if Reform were fully repealed,” he says.
Listen below to Justice Sotomayor going after Paul Clement, the attorney representing 26 states opposing the 2010 law: