The Supreme Court will give its ruling on the a key component in Obamacare that could set off short-term selling in the healthcare stocks and sector-related exchange traded funds at the end of the month.
The healthcare sector has been among the best performing areas of the market this year as the Affordable Care Act helped increase the industry’s client base. Year-to-date, the Health Care Select Sector SPDR (NYSEArca: XLV) gained 9.2%, iShares U.S. Healthcare ETF (NYSEArca: IYH) rose 9.9%, Vanguard Health Care ETF (NYSEArca: VHT) increased 10.7% and Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC) advabced 10.7%. [Healthcare ETFs: More Americans Are Visiting the Doctor’s Office]
However, more investors are beginning to rethink the sector ahead of a high court ruling on King v. Burwell, which argues that tax credits currently being paid to health insurers in 34 to 37 states that use the federal health insurance exchange are illegal. The Supreme Court will give its final say on or before June 29, reports Jeff Benjamin for InvestmentNews.
“We’re not putting ourselves out as constitutional law experts, but we are saying there’s probably a 40% chance the ruling favors the plaintiff and that will be bad news for a lot of healthcare stocks,” John Canally, chief economic strategist at LPL Financial, warned in the InvestmentNews article.
The hullabaloo stems from a small detail in the ACA that says state tax credits are available to people who acquired health insurance through an exchange established by a state. However, about 34 other states have let the federal government establish exchanges, and now some argue that these states are not eligible for subsidies as defined by the ACA.
Consequently, if the Supreme Court rules in favor of the plaintiffs, people getting insurance in the 34 states with a federal government established exchange may not be eligible for subsidies. To better understand how this could affect the healthcare industry, 87% of people receiving insurance through exchanges are getting a tax subsidy, and among the 87%, subsidies cover an average 79% of premium payments. About 6.4 million HealthCare.gov customers could lose their Obamacare subsidies, while many more may drop their insurance due to higher premiums, if the courts rule in favor of the plaintiffs, CNBC reports.