Healthcare stocks having a banner year

For-profit healthcare gets big bump from King v. Burwell ruling.

Healthcare stocks are having a big year, with July's King v. Burwell ruling putting them over the top.

"There's renewed confidence that a majority of patients who come in for care will have health insurance, lessening the burden of uncompensated care," said Phil Kamp, CEO at Chicago-based Valence Health.

In a 6-3 vote, the Supreme Court upheld federal subsidies for the Affordable Care Act in all states, including the 34 under federal exchanges.

"This sunnier outlook for the provider world is reflected in the higher trading numbers for publicly held health systems," he said.

For starters, shares of Dallas-based Tenet Healthcare, operator of 80 hospitals and more than 400 outpatient facilities, increased more than 12 percent. Similarly, Hospital Corp. of America, and Universal Health Services gained almost 9 percent and 7.5 percent, respectively, following the ruling.

"Tenet, HCA and others benefit from the increased insured population," said Fred Weiss, managing director of mid-cap growth equity strategy at Atlantic Trust, an Atlanta-based wealth management firm. "With the ACA, more people have insurance, reducing hospital bad debt for services they are already providing. So, hospital margins improve." Weiss expects this upward tick to continue.

"Approximately 13 million Americans gained coverage under ACA out of approximately 50 million prior uninsured. The Congressional Budget Office expects this newly insured population to double over the next few years, further reducing the uninsured population," he said.

Kamp called ACA's fall open enrollment "the next big data point."

"By January, investors will have a better picture of what enrollment looks like, including the impact of a few Medicaid expansion," said Kamp, who expects another change in hospital stocks at that time.

"If enrollment lags significantly behind expectations, trading will likely go down. Conversely, if we learn that even more folks purchased insurance or are now covered by Medicaid, prices would move upward," said Kamp, underscoring that hospitals, including for-profits, need to practice value-based care that aligns incentives, lowers costs and improves quality.

"The big trend underway is the market shift toward more value-based financial arrangements. As that continues and providers gain greater control of their financial viability, I believe the market will build up its resistance to moderate political changes and tweaks," he said.

As alternative payments continue to replace traditional fee-for-service models, Weiss said hospital financial leaders should "realize that accountable care organizations are coming and develop the infrastructure, skills and technology to succeed in this new environment."

[Also: Supreme court upholds Obamacare subsidies]

Kamp agreed, saying that hospitals need to be highly efficient now.

Providers also need to develop new sources of revenue to compensate for losses resulting from value-based reimbursement models. "Hospitals need to build new capabilities so that when markets flip to value-based care, they aren't caught flat footed. The world is changing and, while for-profit hospitals have enjoyed a good run under FFS, they need to be prepared for value-based care," said Kamp.

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