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 The court will meet next on Monday, though may not issue a ruling on
King v. Burwell, a challenge to President Barack Obama's signature
healthcare reform legislation, until later this month.
At issue are the tax credits that help about 6.4 million low- and
moderate-income Americans buy insurance. If the Court rules against
the credits, millions of Americans may find they cannot afford their
insurance. This could affect the health insurers as well as
hospitals and other providers that benefited from Obamacare's
expansion of the number of people with healthcare coverage.
The court's vote is expected to be close, but so far investors seem
bullish.
"Option activity over the last few weeks in hospital stocks suggests
that the options market is betting on a post-Supreme Court decision
rally," said Anshul Agarwal, equity derivative strategist at Bay
Crest Partners in New York.
Even if the subsidies aren't upheld, some expect that political
pressure will motivate lawmakers to quickly come up with an
alternative for people affected and hope the court would stay
enforcement of a ruling until a solution is in place.
A negative ruling for Obamacare could result in an immediate selloff
of healthcare stocks, but it will be short lived, said Sven Borhos,
founding general partner at OrbiMed Advisors in New York, which
invests in healthcare stocks including HCA Holdings Inc <HCA.N>.
"People will want to buy the dip," he said.
Companies in the spotlight include hospital operators such as HCA,
Tenet Healthcare <THC.N>, Community Health Systems Inc <CYH.N> and
LifePoint Health Inc <LPNT.O>, and insurers including UnitedHealth
Group Inc <UNH.N>, Humana Inc <HUM.N>, Anthem <ANTM.N>, Aetna Inc
<AET.N>, Molina Healthcare Inc <MOH.N> and WellCare Health Plans Inc
<WCG.N>.
As the ruling nears, investors have been pushing up those stocks.
HCA has risen more than 18 percent while Tenet is up 11.8 percent
and Community has gained 10.4 percent since the close of trading on
March 3, the day before the court heard arguments on the case.
Many health insurance companies have also moved higher in the same
timeframe with Aetna up 18.1 percent, Anthem rising 12.3 percent,
and Molina up 11.4 percent.
The S&P health care index <.SPXHC> is up 9.6 percent so far this
year, making it the top performing S&P 500 sector.
The iShares U.S. Healthcare Providers exchange-traded fund <IHF.P>
has also done well, with much of the upside action coming since
March 3. The fund is up 8.9 percent since then and 16.8 percent year
to date. It has also seen inflows of $204.35 million in 2015,
according to data from ETF.com, with $144.61 million of that coming
since March 3.
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Regardless of how the ruling goes, some of these stocks could move
significantly right after the news. Options activity has surged for
some of these names as traders position themselves for greater
volatility.
For Tenet, HCA Holdings, and Community Health Systems, the 30-day
implied volatility, a gauge of the risk of a big move in the stock,
has jumped dramatically since March 4, when the Supreme Court heard
arguments on the case.
The uptick in options activity at Tenet Healthcare, the
third-largest U.S. for-profit hospital chain, is by far the most
noticeable. Open interest is at 136,000 contracts, up 85 percent
from March, and most of the increase is driven by activity in calls,
usually used for making upside bets.
Open interest in calls has nearly tripled to 93,000 contracts
compared with a mere 9 percent increase in open interest in puts.
Calls banking on the shares rising north of $55 by mid-July
represent the biggest block of open interest. Tenet shares were at
$52.63 on Thursday.
Bullish action would continue the group's trend so far this year,
with Humana, Hospira and Cigna all among the S&P 500's biggest
percentage gainers in 2015.
"While there is a lot of expectation for a big move in these stocks,
there is little evidence of hedging the move to the downside,"
Agarwal said. "This might result in sharp selloff in case the
decision goes against these companies."
(Additional reporting by Ryan Vlastelica; Editing by Linda Stern and
Meredith Mazzilli)
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