What the Recent ACA Ruling Means for Health Care Stocks

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Earlier this month, a Texas judge ruled the Affordable Care Act (ACA) unconstitutional, sparking a fresh wave of fears that an ACA repeal will hurt providers’ growth and profitability—and sicken Health Care stocks. However, while the ruling adds to uncertainty, it likely doesn’t change much in the short term, as the appeals process likely drags on and on. In the meantime, the ACA will remain in place, likely muting the market impact at least until potential outcomes start coming more into focus.

The Texas court’s ruling stems from a suit filed earlier this year by 18 Republican state attorneys general and two GOP governors. Their basis for alleging unconstitutionality was that the Supreme Court upheld the ACA in 2012 because the individual mandate was technically a tax, which was in Congress’s purview to set, rather than national health care regulation (a matter left to the states). Once Congress repealed the individual mandate as part of 2017’s tax reform, the plaintiffs argued the entire ACA is unconstitutional. President Trump’s administration is the defendant in this case but declined to defend the law in court, so a group of Democratic attorneys general stepped in.

The Texas judge ruled in the plaintiffs’ favor, noting that because the individual mandate is interwoven in the law, it can’t be separated out, rendering the entire ACA invalid. If this ruling stands, it would negate ACA provisions including Medicaid expansion, subsidized private insurance, protections for people with preexisting conditions and allowing adults under 26 to remain on their parents’ plans. However, as the defendants are appealing, the ACA will remain in force for the time being.

How this all plays out is anyone’s guess. The defendants, led by California Attorney General Xavier Becerra, will challenge the ruling in the Fifth Circuit Court, which is in New Orleans. Some consider this court conservative, leading many to presume it will uphold the Texas court’s ruling. If this happens, the case could move to the Supreme Court. Given the appeals process’s typical speed, the earliest the Justices would hear the case would likely be in late-Fall 2019, and it could get pushed into 2020.

In short, there are two potential outcomes: maintaining the status quo or unwinding the ACA. Few expect the latter, considering the Supreme Court has already upheld the ACA twice since its passage. Most expect the decision to come down to Chief Justice John Roberts, who last upheld the ACA. Should the Court uphold the Texas ruling, however, it would force Congress to strike a new deal or re-establish an arbitrary “tax” to preserve the law’s legality—theoretically maintaining the ACA while not implementing a large tax burden. The uncertainty associated with this potential outcome apparently weighed on sentiment toward Health Care Providers and Services in the Texas ruling’s aftermath, but given the lack of fundamental changes to the law for now, the near-term impact should eventually prove mild.

However, just as the ACA created winners and losers when it passed, the same could happen if the Court orders the ACA unwound. The most subject to ACA uncertainty within the Health Care sector are Health Care Providers and Services (think: hospitals and managed care firms). Managed care firms typically behave more like Insurance companies than Health Care firms. So while the Texas ruling doesn’t change fundamentals much, those fundamentals weren’t great to begin with. Pharmaceuticals, in our view, have much stronger potential, as we discussed recently, and they are largely unscathed by this issue.

Our broader view on ACA repeal chatter hasn’t changed. Health Care stocks have dealt with it for years, and it doesn’t appear to be presenting headwinds in the here and now. Nearly 8.5 million people signed up for Affordable Health Care Act plans for 2019—with a last-minute rush signing up over the weekend following the court ruling. So while the latest ACA threat could cause some uncertainty as this case moves through the courts over the next few years, we see no immediate threat to Health Care stocks today.