Health care stocks soar on Senate reform bill

Shares of hospitals, health insurers and drug makers got the legislative version of a steroid injection Thursday after the Republican-controlled Senate unveiled its plan to revamp the U.S. health care system.

Thursday's health care rally was broad-based, building on recent gains that have propelled the sector to a gain of 17% this year vs. a gain of nearly 9% for the broad U.S. stock market.

Hospital stocks were in major rally mode, with HCA Holdings (HCA) closing up 2.5% and Universal Health Services (UHS) finishing 1.8% higher. Insurers also closed higher, with Aetna (AET) and Anthem (ANTM) up nearly 1%. Centene (CNC), a big player in the Medicaid managed care business, was up 3.6%. Drug makers were also up big, with Bristol-Myers Squibb (BMY) up 2.3% and Eli Lilly (LLY) gaining 2%. The big winner in the biotech arena was Gilead Sciences (GILD), which surged 4.4%.

The Senate draft bill, which is aimed at repealing and replacing the Affordable Care Act, known as Obamacare, is seen as “more moderate” than the earlier House plan. It requires passage in both the Senate and House to become law.

Some pluses for stocks under the Senate plan, according to Wall Street analysts, include: a “less draconian” approach to drug pricing; extending coverage for people covered through Medicaid expansion funding through 2024 rather than 2020; eliminating taxes paid by the rich to pay for Obamacare; and establishing two funds totaling $119 billion to stabilize the individual insurance exchanges, which have come under pressure due to rising premiums resulting from treatment of more costly elderly and sick patients.

“The Senate bill, though similar to the House bill, is seen as more moderate,” says Jeffrey Loo, health care equity analyst at CFRA Research.

Adds Vishnu Lekraj, senior equity analyst at Morningstar: “The Senate legislation gives(health care companies) an opportunity to operate in a more profitable environment.”

The Senate’s plan eliminates the penalty Americans had to pay for not getting health care coverage. But it keeps Obamacare tax-credit driven subsidies to help offset the cost of health insurance for those that don’t get coverage at work.

Here’s why specific types of health care stock are rallying:

* Hospitals. By delaying the phase out of Medicaid expansion funding for seven years, more poor Americans will retain their health care benefits for longer, which means hospitals will have more insured patients that will pay them when they check in for care. The continuation of tax credits as a way to help people  pay for their own coverage also boosts the number of insured patients hospitals treat. Steps taken to stabilize the individual insurance markets, where the uninsured can shop for coverage on the open market, is also a plus.

“The Senate bill is helpful to hospitals because less people would lose insurance coverage compared to the House bill,” predicts Loo. “More insured patients lead to more revenue.”

Under the House plan, an estimated 23 million Americans now covered under Obamacare would lose health benefits by 2016, according to the Congressional Budget Office. The CBO will soon provide its analysis of the Senate bill.

* Drug makers. Despite fears of a crackdown on high-priced drugs during the presidential campaign, the Republican-driven overhaul has taken a “kid gloves” approach to drug pricing, says David Windley, a health care analyst at Jefferies. The less-draconian approach means less chance of profits at drug makers such as  Pfizer (PFE) and biotechs such as Amgen (AMGN) being reduced due to government price controls. Drug makers are also seen benefiting from an easing of regulations, analysts say.

* Health insurers. The more gradual phase out of Medicaid expansion, which helps insurers with sizable Medicaid membership, as well as steps to shore up individual exchanges, should benefit insurers. “Health insurer stocks are up because there are near- and long-term market stabilization measures,” says Kim Monk, managing director of Capital Alpha Partners. “From a big picture perspective, the individual market is pretty much lost for big insurers. (So) even though repeal and replace of Obamacare casts near-term uncertainty, the Republican brand of reform is positive because it means there could be a viable individual market in the future.”

There’s one other factor driving health care shares higher: the belief that a bill to replace Obamacare is getting closer to passage. That would eliminate uncertainty and could pave the way for the Trump administration to get other parts of its economic agenda passed, analysts say.

Says Erik Davidson, chief investment officer at Wells Fargo Private Bank: “Investors are seeing brighter prospects for health care companies … and are more focused on the potential breaking of the stalemate that has persisted for months.”