The Biggest Investor Worry of the Election Season
Worried about whether a Democrat or a Republican will be running the White House for the next four years? Don't be. Or at least if you're invested in health-care stocks, worry about it less than this: Right in the middle of the run-up to the election next year, the Supreme Court will likely make a decision about the constitutionality of the health-care reform act.
This week, the Justice Department asked the Supreme Court to review a U.S. Court of Appeals decision that struck down the law. Separately, 26 states and a business group opposed to the law asked the justices to review its constitutionality. A quick decision seems to be the only thing the two sides can agree on.
Uncertainty: Bad. Speedy decision: Good
The Supreme Court still has to accept the lawsuit for review, but assuming it does, a decision would likely come by the time the deliberations are scheduled to end in June.
A quick ruling is exactly what companies need. It's kind of hard to make business decisions when you don't know exactly what the law will require of the companies. That's especially problematic for health insurers since the law regulates who they have to take into their health-care plans.
Half a law isn't better than no law at all
In fact, it's worse. Much worse.
If the Supreme Court were to strike down some of the law -- specifically the part mandating that all Americans carry health insurance -- but the court leaves the rest alone, insurers will really suffer.
In 2014, health insurers will be required to accept all patients regardless of their medical history. The companies can afford to take on higher-cost patients without sending premiums through the roof because the costs will be shared among a larger insurance pool that includes relatively healthy people required to carry health insurance. It's just not going to work if companies have to take everyone with the mandate struck down.
Similarly, pharmaceutical companies such as Pfizer (NYS: PFE) and Merck (NYS: MRK) and even biotechs with drugs on the market -- think Biogen Idec (NAS: BIIB) and Dendreon (NAS: DNDN) -- are counting on an increased number of patients with insurance to drive sales. The drug industry agreed to fund the Medicare doughnut hole partially because they knew they'd be able to make up some or all of the loss through higher volumes once the mandate kicked in.
If part of the law is struck down, Congress could, of course, fix the law so that companies aren't adversely affected, but considering how contentious it was to get the law enacted in the first place, I have a hard time seeing an easy fix.
Moves for inventors
If you've got the guts for it, volatility during the run up to the decision could be your friend. UnitedHealth Group (NYS: UNH) , Aetna, Humana, AMERIGROUP (NYS: AGP) , and WellPoint (NYS: WLP) are all well above their lows of 2009 when investors were freaking out about what the legislation would look like, and they've all handily beaten the S&P 500 over the past two years.
On the drug side, there will be some impact, but we're only talking about a percentage or two off the earnings. While that's less than ideal, FDA approvals and clinical trial results will have a larger impact on the long-term health of drugmakers than this decision by the Supreme Court.
At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Dendreon and UnitedHealth Group. Motley Fool newsletter services have recommended buying shares of Pfizer, UnitedHealth Group, AMERIGROUP, and WellPoint; and creating a diagonal call position in UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.