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Financial Sector Reacts To SCOTUS Ruling

More reaction to the SCOTUS ruling via Associated Press, this time from the financial services sector.

NEW YORK (AP) — Citi Investment Research analyst Carl McDonald:

“The decision to uphold the individual mandate was one of the few Supreme Court outcomes that shouldn’t result in much volatility — The decision essentially maintains the status quo. We can argue the stocks might be off a little, since there was hope the court would eliminate some of the negative aspects of health reform, but at the same time, it’s easy enough to argue for the stocks to rise a bit now that we’ve gotten through this significant overhang.

“The macro picture in the second half of 2012 seems to favor the managed care plans — If President Obama is re-elected, it again affirms to us the status quo that is currently reflected in valuations. If Republicans win in November, we would expect the group to rise up to 20 percent in the aftermath given the favorable impact Republicans could have on 2014 earnings. With the election polls basically 50/50 right now, that’s a pretty compelling risk reward scenario for the group.”

Goldman Sachs analyst Matthew Borsch:

“Managed Care: An incremental negative but may imply less uncertainty: We expect selling pressure on managed care given our belief that investors would have seen an overturn of reform as a better outcome for the sector. However, we think any selling pressure will be modest since this ruling is the outcome most investors had anticipated prior to the oral arguments in late March. Moreover, this ruling implies less uncertainty than any other outcome, in our view, and avoids the ‘mandate only’ outcome we believe many investors saw as ‘worst case.’ Meanwhile, this ruling is net positive for Medicaid names (Amerigroup Corp., Centene Corp., Molina Healthcare Inc., WellCare Health Plans Inc.) since Medicaid coverage expansion survives (even though the Court apparently has given states the ability to ‘opt out’ of the expansion). We maintain our ‘Neutral’ coverage view and 2012-2014 EPS, which already reflect current law, for Medicaid and commercial / Medicare.

Hospitals the ‘net winners’ under this outcome: We expect hospital names will trade up on this ruling as it represents their “best case” outcome, in our view, setting up 2014 to be a good year if the coverage expansion is fully implemented on schedule. However, pressures on the outlook from other sources (e.g., responses to the fiscal cliff) remain and uncertainty over the fate of reform will remain high ahead of elections. We maintain our earnings per share (already reflects current law) for our covered hospital names (HCA Holdings Inc., Community Health Systems Inc., and Tenet Healthcare Corp.).”

FBR Capital Markets analyst Benjamin Salisbury:

“On first read, we view this as most positive for hospitals and somewhat positive for pharma and insurers. It is likely to be viewed most negatively for medical device manufacturers and neutral to somewhat negative for rehab, nursing, and home health. This decision was largely unexpected as consensus expected a repeal of the individual mandate. Although that uncertainty has been alleviated, the law will continue to be a focus in the election and potentially Congress next year.”

A group of Jefferies & Co. analysts:

“A status quo Supreme Court decision provides visibility and clarity on the forward operating environment for both providers and payors. This morning’s rally in providers could be limited as investors turn their focus back to weak fundamentals, the upcoming elections and deficit-reduction initiatives. For payors, we expect better earnings performance in the second quarter (due to soft utilization trends) and Medicare Advantage and Medicaid member growth.”

“With Medicaid expansion AND the individual mandate upheld, the outcome of the Supreme Court decision was slightly better than what most investors had expected (i.e. mandate gone). Having the whole law upheld is driving strength in providers as it keeps key beneficial provisions in place (i.e. those that reduce the uninsured), but we believe the rally will be short-lived. While the Supreme Court decision eliminates a key, long-standing overhang on provider stocks, we believe that investor focus will gradually shift over the next few months to other looming issues such as the elections, the doc fix later this year, and a likely deficit reduction/debt ceiling bill in early 2013, so we expect the momentum in the provider group to be relatively short-lived, particularly as investors in the crowded ‘long hospital’ trade begin to take profits.”

Mizuho Securities analyst Michael Matson

“The Supreme Court has upheld the individual mandate and Medicaid expansion. We think this is neutral for med tech stocks. While the medical device excise tax remains, the individual mandate and Medicaid expansion should lead to a decline in the uninsured during 2014-2016 and an increase in med tech procedures that could partially offset the excise tax.”

BMO Capital Markets analyst Dave Shove:

“Managed Care: No New Surprises – The whole group has been preparing for Patient Protection and Affordable Care Act since its passage, which is the good news. The bad news, for some players, is that the small group and individual market will remain a tough sandbox to play in.

Hospitals: More Insurance Coverage – Medicaid expansion was designed to provide more than 15 million people with healthcare coverage by 2016, which would reduce the amount of uncompensated care that flows through hospitals. Now – without a big stick – the expansion after that is unknown. Profitability and cash flow are poised for medium-term improvement – how much improvement is really the question now.

Pharmacy Benefits Managers: Yawn – As the most insulated group from the reform fallout in 2010, the PBMs remain largely unaffected.”

Barclays Capital analyst C. Anthony Butler:

“This ruling came as a surprise to some investors, who in recent days have been expecting the overturning of the individual mandate if not the entire act. We believe that today’s decision has minimal effect on the fundamentals of the U.S. pharmaceutical companies, and there is unlikely to be any long term effect on the valuations of the sector.

The industry has been impacted by the Patient Protection and Affordable Care Act since its enactment in 2010. In 2011, manufacturers started paying a 50 percent discount to Medicare Part D beneficiaries whose are in the so-called ‘donut hole’ or coverage gap. There were also increased rebates to Medicaid programs. The sector have been paying an industry excise fee — totaling $2.5 billion in 2011 and $2.8 billion in 2012 for the entire sector — which has been recorded as selling, general and administrative expenses. Starting in 2013, those companies with medical device exposure (i.e. Johnson & Johnson, Abbott Laboratories) will need to pay a 2.3 percent deductible tax on U.S. medical device sales.

We expect increased health care coverage in the pool of uninsured Americans (around 35 million) starting in 2014, though the actual volume upside may be lower and more modest then some expect.”

 

Copyright 2012 The Associated Press.

 

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