Does Wall St. know how the Obamacare hearing ends?
posted at 9:30 am on April 1, 2012 by Jazz Shaw
How will the saga of Obamacare Goes To Court end? Everyone has an opinion, as usual. We’ve asked bloggers and lawyers and pundits of all stripes, with no two opinions being the same. But has anybody thought to check in with Wall Street and see if they’ve broken out the Magic Eight Ball yet? Matt O’Brien at The Atlantic did just that.
Nobody except Justice Anthony Kennedy knows what will happen to Obamacare. But Wall Street, whose predictive powers are dubious, thinks it does. The proof is in the healthcare stocks.
The below chart shows Aetna’s stock price the past week. Check out the vertical action today. That’s a single day increase of over 6.5 percent.
It’s not just Aetna. UnitedHealth Group, Humana, and Wellpoint are all up between 2 and 5 percent on the day too. What’s going on?
One reasonable conclusion is that Wall Street’s betting that Obamacare will either be struck down in its entirety or upheld in its entirety. Both would be very, very good news for healthcare companies. The death of the individual mandate, alone, would be bad news for Big Insurance.
As predictions go, that’s a fairly wishy-washy one. But the underlying theory looks pretty sound. If you’re a health care company – or, more to the point, one of their investors – it may not make all that much difference if the law is thrown out in its entirety or kept completely intact. If the former, then it’s business as usual. (And business is still pretty good in that particular market.) If the latter, it means that big changes are coming, but they include a new golden age where pretty much every person in the country will have to buy their product. To put this in perspective for progressive dreamland, that’s like owning stock in a solar panel company shortly before the federal government mandates that every single structure in the country down to the last dog house, chicken coop and rib shack will have to have panels on their roof. Sounds like a business I’d want to be in on.
But if the mandate is struck down and the rest of the government restrictions go into effect, the picture becomes much darker for the insurance companies. They won’t have any control over who they cover for what treatments, with nobody being turned away, but nobody will have to purchase their product. This essentially means that the young and healthy can keep their money in their pockets until they get sick and the only customers coming to their door will be there to claim increasingly expensive benefits. Not a good business model at first blush, eh?
But investors seem to think that is the least likely outcome and are picking up health insurance stocks at a brisk clip. Are they prescient or about to be sucked into a completely losing proposition? We won’t know until June at the earliest, but one stock analyst I trust, Joe Weisenthal, came to the same conclusion.
On Tuesday, the Supreme Court was debating the constitutionality of the individual mandate — whether the Federal Government could demand that individuals buy health insurance. This law is a good thing for health insurers, since it means scads of new customers. And many of those customers will be ideal, since they’ll be young healthy people that don’t end up sucking much out of the insurer pool.
But when that had a bad day in the court the stocks fell.
However, the next day the Supreme Court took on the issue of “severability” and whether the death of the individual mandate would impact the rest of the law.
Let’s back up. …
Another angle of the law is that insurers can no longer deny people insurance for pre-existing conditions. The inability to deny people with pre-existing conditions is only economically feasible if you have the mandate, since otherwise people just don’t buy insurance until they get sick, and then sign up as soon as they do, turning the whole idea of insurance on its head.
An Obamacare without the mandate is horrible for insurers who end up getting a lot of people as customers who only exploit the system.
Well anyway, yesterday Obama had another bad day in court, suggesting that if the Supreme Court tosses out the individual mandate, they’ll also toss out the rest of the law, meaning insurers won’t have to take on people with pre-existing conditions.
So investors are buying up these stocks, because the nightmare scenario of having to accept customers with pre-existing conditions but not having the mandate may be off the table.
Sounds about right to me.