Ruling against subsidies could hit hospital stocks harder than earnings

Hospitals and investors are banking on the U.S. Supreme Court or the states to save premium subsidies that have made health insurance affordable for 6.4 million people in 34 states. But the stocks of publicly traded hospital companies could take a big hit if that doesn't happen.

Hospital executives are nervously anticipating the high court's imminent ruling in King v. Burwell, which could invalidate premium tax credits in up to 37 states using the federal exchange. Their preparations have varied widely, with some saying their strategy is watchful waiting. The American Hospital Association has hired consultants Manatt Health Solutions to work with state hospital associations to develop contingency plans.

Urban safety-net, rural, faith-based and academic hospitals are most likely to feel the impact, said Guy Collier, a partner at law firm McDermott Will & Emery.

Hospitals will see unpaid bills and charity care increase as lower- and middle-income patients “go back to being at financial risk without resources to take care of themselves,” said Marvin O'Quinn, chief operating officer for San Francisco-based Dignity Health system. St. Louis-based Ascension Health, which operates in 23 states and has 131 hospitals, will rely on charity care and billing policies previously in place if subsidies go away, said Anthony Tersigni, Ascension's CEO.

If the court decides against the subsidies, the justices potentially could delay a cutoff. “If it does get disrupted, we would have, we hope, a transition time,” said Kevin Brennan, chief financial officer of Geisinger Health System, based in Danville, Pa. In that state, Democratic Gov. Tom Wolf recently proposed a plan to create a state-based exchange to preserve subsidies, but his plan may face tough slogging in the Republican-controlled Legislature.

Eight out of 10 of the 400,000 people insured through Pennsylvania's federal exchange receive subsidies amounting to 75% of the cost of the average bronze-tier plan, said Andy Carter, CEO of the Hospital and Healthsystem Association of Pennsylvania.

Other health systems are simply crossing their fingers that the justices will keep the subsidies. “I know hope is normally not a strategy, but in this case we are very hopeful that we don't get an adverse decision, just because of the implications,” said Michael Abrams, CEO of the Ohio Hospital Association.

Political and legal hurdles to establishing a state-based exchange vary by state, depending on whether the governors are empowered to act on their own or need legislative approval, said Richard Pollack, who takes over as the American Hospital Association's CEO in September. State hospital associations are drafting contingency plans for the operation of state-based exchanges—from enrollment efforts to consumer oversight to financing—and considering what agencies or contractors might do the work, he said.

Craig Becker, president of the Tennessee Hospital Association, said his state's conservative Republican Legislature would have to approve and fund a state-based exchange. “It's going to be a challenge.”

Tennessee officials anticipate that knocking out the subsidies would ripple through the entire individual insurance market. “We're looking at 280,000 who lose their subsidies and we figure most of those will come off the rolls,” Becker said. “That will really mess up the individual market, which is already talking about increasing rates by 34% in our state.”

Some health systems with small numbers of patients insured through the federal exchange express less concern. “It's not that big of a piece of our business right now,” said Gary Brock, president and COO of the North Texas division for Dallas-based Baylor Scott & White Health. Exchange revenue accounts for roughly 1.2% of his system's revenue.

The loss of subsidies and coverage would come as the government plans to cut $270 billion from Medicare and Medicaid over the next 10 years. “If you have these cuts and you don't have (these) newly insured patients, the picture is pretty grim for hospitals,” Collier said.

Stock market investors—who have rewarded hospital chains over the past two years as earnings results have continually surpassed expectations—seem confident that the court will uphold the subsidies or else that the states will take action to keep them. In a survey conducted by investment bank RBC Capital Partners, 65% of respondents predicted the subsidies would be upheld. A combined 85% indicated that “most” or “some” states would adopt workarounds.

But that optimism could mean that share prices will take a major hit if investors are shocked by court and state actions that go the opposite way.

Paula Torch, an analyst at Avondale Partners, said hospital companies will see growing revenue and earnings no matter which way the ruling goes. The improving economy, the volume uptick from the ACA's Medicaid expansion and strategic efforts to bring in additional patients will continue to boost earnings, she predicted. “The impact (of a ruling against the subsidies) is going to be more to the stocks” than to earnings, she said.