--President Obama's re-election solidifies health-care overhaul law
--Hospital stocks gain because law will cover more people, cutting down on pressure from unpaid bills
--Managed-care firms slide amid questions about how law will impact earnings
(Updates to add comments from WellPoint CFO, analyst, details on device industry.)
By Jon Kamp
Hospital stocks surged Wednesday while big health insurers slumped following President Barack Obama's re-election, which solidified the future of a complex health-care overhaul law that promises a mix of coverage-expanding benefits and new pressure points for health companies.
The health sector still faces plenty of questions as the law is implemented in coming years, and the political tussle over federal spending challenges companies with strong tethers to Medicare spending. Still, similar to June's Supreme Court ruling, which largely upheld the health law, the election clears away a big source of uncertainty by removing the chance for repeal under a Republican administration.
The health-care sector in general performed better than the slumping broader market, helped by surging hospital and Medicaid-insurer stocks that partially offset slides elsewhere. The NYSE Healthcare index--which covers a range of insurers, device and pharmaceutical companies, providers and others--recently traded down 1.9%, compared with a 2.5% decline in the Standard & Poor's 500 index.
Hospital stocks in particular have received a bounce from Mr. Obama's re-election. Companies such as HCA Holdings Inc. (HCA) are expected to benefit as around 30 million Americans gain insurance coverage starting in 2014, which should lessen the burden hospitals bear from patients who can't pay their bills.
HCA--the biggest for-profit hospital firm, which Goldman Sachs upgraded to buy from neutral--surged 7.6% to $33.28 in recent trading. Among other companies, Health Management Associates Inc. (HMA) jumped 6.4% to $8.21, and Community Health Systems Inc. (CYH) gained 6% to $30.41.
While hospitals also are facing lower Medicare payments, "the impact of reimbursement for previously 'uncompensated care' represents a major change and significant boost for these companies starting in 2014," Goldman analysts said.
Also helping the hospital sector Wednesday was better-than-expected earnings results from Tenet Healthcare Corp. (THC), shares of which jump 8%.
Managed-care companies are also expected to benefit by gaining millions of new customers, but this is offset by a squeeze on profit margins as key parts of the law click into place, such as a requirement to cover people with pre-existing conditions. All the major companies slumped, led by a 9.9% slide to $68.63 at Humana Inc. (HUM).
Goldman downgraded that firm to sell from neutral because of Humana's heavy stake in Medicare Advantage plans, which are private insurers' version of the government plan for the elderly, and face reimbursement pressure under the law.
"With health reform now more likely to move ahead following the election outcome, we see greater downside risk to Medicare Advantage, which we estimate comprises over 70% of the HUM's earnings," Goldman said.
WellPoint Inc. (WLP), which has a large position in individual and small-group health insurance markets that are expected to see the biggest impact from the health law, fell 5.6% to $57.77. WellPoint also reported better-than-expected third-quarter earnings on Wednesday, though it kept its full-year earnings guidance in check, implying a conservative outlook for the current quarter.
Cigna Corp. (CI), a company seen as having modest exposure to major changes under the law because of its focus on commercial plans for large, self-insured companies, slid 1.5% to $52.52.
Managed-care firms are also facing pressure as investors shift focus to questions about how the health law will be implemented, and how it will affect company earnings, rather than whether it will remain in place. Big parts of the law are coming in 2014, such as new exchanges where individuals will be able to buy coverage.
"The good news is having the certainty of knowing this is the act, this is when it goes into affect," said Wayne DeVeydt, WellPoint's Chief Financial Officer, in an interview. But the election "also created a new unknown for investors in our sector: OK what does '14 look like?"
Deutsche Bank analyst Scott Fidel said valuations for managed-care companies will likely remain below historical levels for the next 12 months over uncertainty about the health's law earnings impact in 2014.
Among smaller health insurers, those heavily focused on Medicaid--such as Molina Healthcare Inc. (MOH) and Centene Corp. (CNC)--climbed on the election results because the health-care law aims to expand the government plan for the poor to cover millions of more lives. Molina rose 2.3%, while Centene gained 7.9%. WellCare Health Plans Inc. (WCG), also heavily focused on the Medicaid market, rose 3.5%.
Meantime, shares of medical-device companies such as Medtronic Inc. (MDT), Boston Scientific Corp. (BSX) and Zimmer Holdings Inc. (ZMH) all traded lower. Those companies have been battling to try to do away with a 2.3% excise tax on revenue scheduled to start Jan. 1 under the health-care law. They will have to flex their lobbying muscle now--and they do have some bipartisan support to do away with the tax--to try to push something through Congress.
The Advanced Medical Technology Association, an industry lobbying group, said it hopes to have a device-tax repeal included in any resolution before year-end aimed at avoiding the so-called fiscal cliff, which is a mix of higher taxes and deep cuts in federal spending coming Jan. 1 unless both political parties agree to change current law.
AdvaMed on Nov. 15 will have 50 industry executives come to Washington to meet with members of the House and Senate to argue against the tax. If repeal is not passed this session, AdvaMed says it will look for lawmakers to include the issue in a possible tax reform bill in 2013.
Some large-cap pharmaceutical stocks are off less than the decline in the broader market, including GlaxoSmithKline PLC (GSK), Pfizer Inc. (PFE) and Eli Lilly & Co. (LLY). In general, though, drug stocks were not expected to be as affected by the election's impact on the health-care overhaul.
Drug makers supported the overhaul and agreed to pay higher rebates, taxes and fees in exchange for certain provisions, or lack thereof, that are seen as generally friendly to the industry. The expansion of coverage that will kick in over the next couple of years should increase the companies' customer base, though if many of them are in Medicaid they will be lower-margin customers because of rebates.
--Peter Loftus and Joseph Walker contributed to this article.
Write to Jon Kamp at email@example.com
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