Some health sectors will profit from ruling

ByABC News
June 28, 2012, 7:44 PM

— -- As the doctor removes the 5,000-pound great white shark from your leg, you're probably thinking many things.

Isn't it fortunate there happened to be a doctor on the beach? Was it a bad idea to rub my feet with anchovy oil? And what will happen to health care stocks now that the Supreme Court has ruled Affordable Care Act largely constitutional?

The jury's out on the first two questions, but analysts and fund managers have plenty of opinions on health care stocks. In a nutshell: Some health sectors, such as hospitals, will be huge beneficiaries of the law. Others, such as medical device makers, won't.

The ACA means that about 33 million people currently not covered by health care will have insurance by 2016. Another 26 million, mainly undocumented immigrants, will remain uninsured, says Kaiser Health News.

The idea behind insurance is that healthy people who pay premiums pay the cost of those who get sick. Insurers can use actuarial studies to estimate how many people in a given group will need medical care, and base their premiums accordingly.

Until the ACA, insurers could cherry-pick the pool by excluding the uninsured with pre-existing conditions. Hospitals, charities or individuals had to pay the tab. The new law forbids insurers from not insuring those with pre-existing conditions. Instead, people can buy health insurance through state exchanges.

For insurers, the nightmare scenario was if the Supreme Court struck down the individual mandate — that is, the requirement that the uninsured purchase insurance or pay a fine. The insurers would then have to pick up the tab for the uninsured, but they wouldn't have a larger pool of healthy people to reduce costs.

The Supreme Court ruled the individual mandate constitutional. "It's not a rotten outcome," says Sam Isaly, manager of Eaton Vance Worldwide Health Sciences. But it does make an already complex sector even more complex, he says.

Among the clear winners:

•Hospitals. "For hospitals, it's resoundingly positive," says Derek Taner, lead manager of the Invesco Global Health Care Fund. Hospitals will have to provide less free care, and more people will be walking through their doors.

•Insurers. Many insurance stocks fell after the ruling, but Taner thinks many of the stocks were bid up on the belief that the Supreme Court would throw out the individual mandate or the entire law. "You can't have a functioning insurance exchange by taking out the individual mandate," he says. Currently, health insurance stocks are cheap, compared with earnings, Taner say.

Among losers are medical device makers. The new law imposes an excise tax of 2.3% on the sale of medical devices, which is expected to raise $29 billion over 10 years.

Taxpayers, too, will feel effects, says Tim Steffen, director of financial planning at Robert W. Baird & Co. The law mandates an increase of 3.8 percentage points on investment income for higher-income people, defined as those filing jointly with $250,000 or more in modified adjusted gross income. For single filers, the threshold is $200,000.