June 29, 2012

Ruling gives boost to U.S. health care industry

Thursday's Supreme Court decision could provide the greatest benefit to health insurers and hospitals.

The Associated Press

TRENTON, N.J. - The Supreme Court's decision Thursday to uphold President Obama's historic overhaul is expected to be a boon to most of the health care industry by making coverage more affordable for millions of uninsured Americans.

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A television screen at a trading post on the floor of the New York Stock Exchange headlines the Supreme Court decision on health care Thursday.

The Associated Press

The ruling could give the biggest boost to hospitals and health insurers, but drugmakers and biotech companies also will get additional customers because the law requires nearly everyone to have health insurance by 2014 or pay a fine. That's expected to bring coverage to about 30 million more Americans.

But medical device makers will be hit with a tax on sales as a result of the law, and experts disagree on whether those companies will see much of a jump in business in a couple of years.

Overall, the ruling could boost health care stocks both by increasing access to and use of health care and by ending months of uncertainty and speculation. Shares jumped Thursday for hospitals, but fell slightly for drug makers and most insurers.

Here's the potential impact to each major sector in the health care industry:

DRUGMAKERS

The ruling's effect on drugmaker stocks was muted Thursday. Les Funtleyder, health care fund manager at Poliwogg, a private equity fund for small investors, said that's because the ruling keeps the status quo for those companies.

He noted that the law -- which the industry strongly supported -- didn't carry significant reductions in what government programs pay for medicines. That's a big positive, given that drug prices are much higher in the United States than in other countries and are a perennial target of industry critics and anyone looking for places to cut medical costs.

Biotech and traditional drugmakers likewise already are absorbing the negative parts of the health care law: fees based on their share of the prescription drug market, discounts to seniors on Medicare who have hit the "doughnut hole" coverage gap and much-higher rebates to the government on drugs bought through Medicaid.

All those costs from the overhaul are reflected in drugmakers' share prices and financial forecasts, said UBS drug analyst Matthew Roden.

He said the companies likely will get a boost in drug revenue from new patients starting in 2014, but not a huge one. That's because patients needing the most expensive drugs, for cancer and rare disorders, aren't going without now -- generally are getting them through government or industry patient assistance programs.

Roden said he thinks investors who had shifted into safe-haven stocks such as pharmaceuticals Thursday decided to jump over to hospitals, which appear to have fared best under the ruling.

HOSPITALS

Hospitals perhaps could have the most to gain from the law.

"Hospitals may be the biggest beneficiary because their biggest problem is people without insurance," Funtleyder said.

The 30 million or more people expected to gain health insurance in 2014 will reduce the number of uninsured patients showing up at hospitals needing urgent care, often for conditions that could have been treated much more cheaply early on.

Such charity care has been a big drag on hospitals, and those costs should drop sharply. Federal payments to hospitals to offset some charity care costs will be reduced as more people are insured, said UBS health care services analyst A.J. Rice.

More importantly, he expects those newly insured folks to seek more tests and nonemergency treatments at hospitals, including for chronic health conditions such as diabetes, boosting hospital patient volume. But there are tradeoffs, as hospitals will get smaller annual increases in Medicare payment rates.

"There's a lot of variables to be worked out," Rice said, but "the net effect should be positive" for hospitals.

(Continued on page 2)

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