TRENTON, N.J. — The Supreme Court’s decision today to uphold President Barack 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.
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 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 today 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:
The ruling’s effect on drugmaker stocks was muted today.
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 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 U.S. than 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 thinks investors who shifted into safe-haven stocks such as pharmaceuticals recently on Thursday decided to jump over to hospitals, which appear to have fared best under the ruling.
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,” said analyst Les Funtleyder, health care fund manager at Poliwogg, a private equity fund for small investors.
Indeed, 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 non-emergency 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.
Insurers will get millions of new customers thanks to tax credits that will help middle class people pay for coverage on the individual market, and the state-federal Medicaid program will still expand. Additionally, the requirement that nearly every American have insurance will compel more people to buy coverage.
But insurers will also face hefty fees and restrictions because of the law. The health insurance sector will pay annual fees starting in 2014. They total $8 billion that first year and then climb in subsequent years.
The law also restricts how much insurers can vary their pricing based on things like age and it will require them to cover everyone who applies starting in 2014. The law also requires insurers to spend a minimum percentage of the premiums they collect on care and quality improvements or pay rebates to some of its customers.
Citi analyst Carl McDonald said insurers also face considerable risks that they will get mostly sick people signing up for coverage in the online health insurance exchanges that begin in a couple years. The exchanges are like online marketplaces where people can shop for coverage much like they do for airline tickets on travel web sites.
He noted the mandate that requires people to purchase coverage will lead to only a $95 tax penalty at least initially. The analyst said that won’t be strong enough to persuade young healthy people to sign up for coverage.
The overhaul requires insurers to cover all who apply for insurance starting in 2014, which means they won’t be able to deny coverage to someone with a pre-existing condition like diabetes. Insurers have said that for this to happen, they will need a balance of healthy customers to counter people who produce more in claims than they pay in premiums.
MEDICAL DEVICE MAKERS
For medical device makers, the bad news is that the tax on devices stays. Medical device makers will have to start paying a 2.3 percent tax beginning in January on their sales of devices such as pacemakers and CT scan machines imposed under the overhaul law. But they could more customers.
Funtleyder, the health care fund manager, said it was all negative, because he doesn’t foresee a big jump in device sales resulting from the ruling: “People who need a pacemaker already were getting one.”
But Leerink Swann analyst Richard Newitter wrote that he expects more doctor visits and hospital procedures to increase sales of devices.
One trade group for the industry, the Medical Device Manufacturers Association, said that Congress and the president must repeal the tax, arguing it would make it harder for companies to develop innovative new devices.
“It is clear that this misguided policy has already led to job losses and cuts to research and development,” Mark Leahey, the group’s president, said in a statement.
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