(By Kevin Donovan) Outside of biotech names, rarely does a stock's value, much less an entire sector's, hinge on the outcome of single event the market knows with certainty is coming. But that's what publicly traded hospital companies are facing this week with the expected announcement of the U.S. Supreme Court's decision on Obamacare.
It boils down to this: If the court overturns the Affordable Care Act, including the individual mandate provision, hospital stocks could fall. If the entire law is upheld, the stocks will spike higher. The reason is self-evident. If everyone has insurance, as the law mandates, hospitals' bad debt accounts should shrink commensurately. If not, they will remain bound to the duty of treating anyone who shows up in the emergency room, regardless of the ability to pay.
But the individual mandate aside, the law contains other provisions such as expanded Medicaid and tax credits for buying insurance, so if just the mandate is struck down, hospitals could still benefit.
What appears to be the most likely Court ruling – discarding the individual mandate and keeping the rest – is a net win for the hospitals. The biggest win would entail the least likely outcome of upholding the entire law. Hospital stocks would likely fall if the entire law were struck down.
Intrade.com, which lets users bet on political and other events, places a 78.2% probability on the chances the individual mandate will be struck down. The safest bet may be to go long the stocks and buy puts as a hedge.
In any event, from a valuation and a longer-term perspective, we prefer Health Management Associates (HMA). The company operates 70 hospitals and 451 clinics in 15 states and is actively engaged in ongoing consolidation in the industry. Its latest deal was the purchase of an 80% controlling interest in five INTEGRIS Health Oklahoma hospitals.
The company said that in the first quarter its "uncompensated patient care coverage" was 26.1% of net revenues, compared with 25.4% in the fourth quarter and in the year-ago quarter. Clearly, any expansion of insurance, whether through the individual mandate or expansion of Medicaid, could significantly add to cash flow.
Health Management Associates, with a market capitalization of $1.74 billion, sports a forward PE of just 6.85, compared with 10.37 and 10.41 for similarly sized companies Select Medical Holdings (SEM) and Lifepoint Hospitals (LPNT), respectively.
The stock is down 8% year to date. A friendly decision from the high court could erase that.