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A television screen at a trading post on the floor of the New York Stock Exchange headlines the Supreme Court decision on health care, Thursday.

Richard Drew, Associated Press

High court jolts Wall Street

  • Article by: DEE DEPASS
  • Star Tribune
  • June 28, 2012 - 10:51 PM
Hospital stocks soared but investors pounded some health insurers, drugmakers and medical device stocks after Thursday's Supreme Court decision upholding the Affordable Care Act requiring all Americans to buy insurance or pay a penalty. "Hospital stocks are up huge today. They got an outcome that was shockingly positive," said Sheryl Skolnick, senior vice president of CRT Capital Group. On the flip side, "The health plan insurers kind of took it on the chin.''

The ruling upholds a law requiring all Americans to be insured. The decision will add 32 million Americans to the ranks of the insured. That's a victory for hospitals because when more people get coverage, hospitals "get more paying heads in beds," Skolnick said.

Thanks to a late-day rally, many health care stocks recovered from their lows. The Standard & Poor's 500 health care index had dropped 1 percent by noon Thursday but closed down just 0.3 percent. Earlier, the 5-4 court ruling caused wild swings on Wall Street as investors grappled throughout the day with implications of what law means for them. Many provisions go into effect in 2014. Others are already in motion.

The law also unleashes a host of new fees or taxes on drug and medical device makers, tanning salons, insurance companies and certain policy holders who carry upscale policies. New drug and medical device taxes will raise a respective $33 billion and $29 billion for health coverage over 10 years. Some investors fear that the new taxes will eat into company profits despite an influx of new customers.

"While we view today's ruling as a net-neutral, we believe the group is under pressure," said Richard Newitter, medical supplies and device research analyst at Leerink Swann. He noted that the court's decision upholds a 2.3 percent excise tax on medical device sales. The new tax will lower earnings by 32 percent at small firms or 4 percent at large firms, he said. "In our view, that was the key aspect of the Affordable Care Act in investors' minds."

Shares of Fridley-based Medtronic and Little Canada-based St. Jude Medical fell early in the session, but St. Jude closed up 0.3 percent while Medtronic closed down 0.2 percent.

Matthew Coffina, senior equity research analyst at Morningstar, said that the larger insurers like UnitedHealth have diverse business models and policyholders from every demographic, a blend that will serve them well under the new law. Insurers won't face as much turmoil as medical de vice firms, which often cater to older patients on Medicare.

Under the new law, Coffina said UnitedHealth will face new taxes, changes in Medicare reimbursements and increased scrutiny regarding how it spends premiums. But it will pass any new costs on to policyholders and will enjoy an expanded roster of insured clients.

"UnitedHealth will have some positive and negatives from the new law that will largely cancel each other out. So the overall impact on their earnings power will be modest," Coffina said. UnitedHealth is unlike med-tech firms and smaller insurers, which won't necessarily be able to pass on new costs to their customers, he said.

Newitter at Leerink Swann said that going forward, investors of medical device and pharmaceutical companies will scour upcoming quarterly earnings reports for clarity on exactly how the new law's tax will hurt them. They will also be hungry to learn how companies will absorb new government costs that eat into profits. They will be looking for cost cuts, restructuring changes, share buybacks or other methods that prop up earnings, Newitter said.

Research analysts generally agreed that the investors are most worried about the impact of the ruling on smaller firms.

Rating agency A.M. Best Co. said in a statement Thursday that it "has concerns about profitability for smaller companies that specialize in the individual and small group [health] markets."

But beyond the small firms, the larger industry should fare well.

"Many carriers have diversified over the past few years and offer products to multiple segments, including individual, employer groups, and government sponsored [plans] such as both Medicare and Medicaid managed care," the rating agency said, adding that diversifying membership also diversifies revenues and earnings.

Dee DePass • 612-673-7725

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