Market bump

The future is brighter for hospitals—if the market reaction to the U.S. Supreme Court ruling on healthcare reform is any indication—as investors placed their bets on higher volumes of patients and fewer who are unable to pay.

Publicly traded systems such as HCA, Nashville; Community Health Systems, Franklin, Tenn.; and Tenet Healthcare Corp, Dallas, saw their shares shoot up an average of 8% to 9% as investors digested the court's decision, which left key elements of the law intact, including the individual mandate.

“The biggest fear if the law was overturned was that you wouldn't get the benefit of a reduction in uncompensated care,” but cost and reimbursement pressure would remain, said Michael Waterhouse, an analyst at Morningstar.

Frank Morgan, an analyst with RBC Capital Markets, similarly noted that benefits including an incremental increase in patient volume and less bad-debt expense will “more than offset” financial drawbacks, such as reductions to Medicare's annual marketbasket updates.

While providers were generally happy with the ruling, uncertainty remains for hospitals, which could still feel the impact of the decision's most surprising element—a ruling that Congress cannot penalize states that do not expand their Medicaid programs. “It really creates a scenario where we might not reach full universal coverage throughout the U.S.,” said Richard Close, an analyst at Avondale Partners.

Yet as the closing bell sounded June 29, hospital stocks were still rallying, with HCA trading up more than 12.5%, Community Health Systems, almost 10%, and Tenet, almost 7% over the day before the ruling.

Even with the individual mandate secured, the market was still pricing in some risk to commercial insurers, which will soon have to expand coverage to even the sickest patients.

WellPoint, Indianapolis, closed the week dropping more than 8%, and Aetna, Hartford, Conn., dipped 5.5%.

Yet some insurers, particularly Medicare-focused managed-care organizations, saw a spike that matched hospital systems. They included Amerigroup Corp., Virginia Beach, Va., and Molina Healthcare, Long Beach, Calif., which marked gains of 5% and 9%, respectively, over both days.

Other sectors of the healthcare industry—including post-acute care, pharmaceutical and medical-device companies—barely registered a change.

Healthcare stocks as a whole dropped about 1% in the immediate aftermath of the decision June 28, alongside the broader market. They had largely recovered by the end of the day, closing in line with the Dow Jones industrial average and Standard & Poor's 500 index, which also trimmed their loss to about 20 points.

Clayton McWhorter, former president and chief operating officer of HCA who now runs venture capital firm Clayton Associates, noted that healthcare reform is also creating interest in different payment models as well as health information technology and alternative ways of delivering care. “All this is creating an opportunity for entrepreneurs and VCs.”