Healthcare stocks were among the worst performers in the Standard & Poor’s 500 index selloff Monday: Hospitals and insurance stocks sank on a judge’s ruling that the Affordable Care Act was unconstitutional.
A judge sided with Texas late Friday in a lawsuit alleging that Congress’ decision in 2017 to kill a related tax penalty essentially voided the entire Affordable Care Act, also known as Obamacare. Although many analysts expect the ruling to be reversed by higher courts, Friday’s ruling adds to volatility in a sector that has barely recovered from political overhangs this year and yet remains the top-performing sector in the S&P 500.
U.S. hospitals, which are most at risk from the ruling, fell as much as 4.4% to the lowest since March 1. The drop in the Bloomberg Intelligence Hospitals Index is led by Community Health Systems, Tenet Healthcare, Quorum Health and HCA Healthcare. Tenet was downgraded by Baird after the ruling, while analyst Matthew Gillmor recommended buying HCA and Universal Health on the weakness.
The S&P 500 Managed Care Index fell 2.3% to the lowest since Oct. 29, led by Centene, WellCare, Anthem and Cigna. Molina plunged as much as 13.5%, its biggest drop since February 2017.
“Texas just really messed with us,” Jefferies health strategist Jared Holz said in a note. “We now enter 2019 with a [new] overhang.”
Healthcare investors already were licking their wounds from Johnson & Johnson’s $45-billion plunge Friday related to a Reuters report about asbestos in baby powder.
Centene and Molina are bearing the brunt of the selloff in managed care given their exposure to Medicaid and Affordable Care Act markets, also known as the public exchanges. Both insurers have a total Affordable Care Act exposure of more than 40% of EPS (earnings per share), followed by WellCare Health at 10%, JPMorgan analyst Gary Taylor reminded investors in an email late Friday.
Across publicly traded hospitals, earnings exposure to the healthcare law is as much as 10%, Leerink Partners analyst Ana Gupte wrote in a note. She cautioned that facilities could see a drop in patient volumes and a rise in unpaid bills if people lose their health insurance.
The Monday selloff threatens to diminish or erase payers’ and providers’ gains this year, with S&P 500 Managed Care Index still up 14% and the Bloomberg Intelligence Hospitals Index up 1.5%.
Other subsectors, including medical technology, pharmaceuticals and biotech, are also feeling the aftershock. “This could all be an excellent buying opportunity depending on magnitude of moves and the next steps around another court entering a stay,” Holz wrote.