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Supreme Court Decision On ACA: Impact On Medtech Stocks

 June 05, 2012 02:47 PM

(By Mani) The Supreme Court decision on the Affordable Care Act (ACA) would come this month. Let's see how Medical technology stocks are positioned heading into the decision.

The ACA requires individuals not covered by an employer or government-sponsored insurance plans to maintain minimal essential health insurance coverage or pay a penalty unless exempted for religious beliefs or financial hardship. The potential landmark decision in June is expected to add 16 million people to the rolls of the insured and the ACA will reach about 32 million of the 50 million Americans who are now uninsured.

Several states, organizations and individual persons, have filed actions in federal court challenging the constitutionality of some or all of the elements of ACA.

[Related -St. Jude Medical, Inc. (NYSE:STJ): A Stock With Potential To Outperform Peers]

Some of the large cap medical technology (MedTech) companies that could be impacted by the ACA ruling include ST Jude Medical, Inc. (NYSE:STJ), Medtronic, Inc. (NYSE:MDT), Zimmer Holdings, Inc. (NYSE:ZMH), Stryker Corp. (NYSE:SYK) and Boston Scientific Corp. (NYSE:BSX).

[Related -Medtronic, Inc. (MDT): Turning The Beat Around?]

With 2013 estimates already including the MedTech tax, the market expects minimal reaction if ACA is upheld. A complete overturn should push the shares higher near term, though as U.S. enter election season this fall, attention will then shift to what healthcare reform will ultimately look like.

"While Supreme Court rulings are impossible to judge merely by the nature of the oral arguments, our read of the justices' questions seems to hint at a slight proclivity of the court striking down the entire ACA," Oppenheimer analyst Steven Lichtman wrote in a note to clients.

The best near-term result for MedTech is a complete overturn of ACA as it would remove the looming MedTech tax. Share performance for the group and  money flow analysis suggests that this outcome has been somewhat embedded in the shares since the tough Supreme Court hearings in March.

Should the court strike down the individual mandate but let the rest of ACA stand, this could impact the positive volume benefit of ACA while leaving other components (including the Medtech tax) in place.

"Though this would be Medtech's "worst-case" scenario, we would view this outcome as only a slight negative as the Street does not currently bake in a meaningful pickup in procedural volumes due to the ACA," Lichtman said.

The law will face continued challenges in Congress even if it is upheld, particularly if Republicans win the White House and take more seats in the Senate. Moreover, there are individual challenges to the medical device tax in both congressional houses; the House bill has gotten some traction, but not the Senate.



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