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Obamacare decision is on tap—here's how to trade it

Market impact of Supreme Court decision

A Supreme Court decision set to be released may determine the fate of Obamacare—and it could also have a significant impact on health-care stocks.

The case is King v. Burwell, and the overriding question is actually a quite narrow one regarding whether the letter of the law permits the government to offer health-care insurance subsidies through federal exchanges. But if the Supreme Court rules for the plaintiffs, who are challenging the executive branch's interpretation of the law, the impact on the structure of Obamacare could be grave.

According to forecasts, several million Americans could be set to lose their subsidies and their health insurance coverage.

There could also be a significant impact on health-care stocks. According to Societe Generale's head of U.S. strategy, Larry McDonald, the marketplace is anticipating that the plaintiffs will lose the case, meaning that Obamacare will remain intact. That outcome would be seen as beneficial for hospitals and health-care providers.

"I think the risk-reward against the hospitals right now is probably a good one," McDonald said in a Wednesday "Trading Nation" interview. Conversely, "the risk-reward of being long them is bad, because a lot of good news is priced in."

The U.S. Supreme Court
Gary Cameron | Reuters

However, Erin Gibbs of S&P Capital IQ says the trade is not quite that clean. That is, health-care stocks wouldn't necessarily drop on an Obamacare-adverse decision.

S&P has calculated that "about $21 billion in tax credits annually could be lost" if the court finds for the plaintiffs. "Now, how much of that tax credit would actually be affected as to revenues, where people would actually just drop their coverage because they couldn't afford the insurance anymore, it's a little unclear."

Because the impact will be foggy, and the administration's likely policy response remains unclear, "We don't know how much this would affect the insurers. Also, there's a lot of talk of kicking this down the road so that [individuals who would eventually lose subsidies] would still get tax credits for the next two years. So really, we don't see a huge amount of impact on the actual income of either the insurers or the hospitals for at least the next two years. So fundamentally, we see it as having a small impact overall."

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And even if the Supreme Court rules against the administration's interpretation of the Affordable Care Act, and further, that the administration doesn't find a legal workaround in order to more or less maintain the status quo, and further, that individuals are moved to drop their existing insurance plans—even then, the impact on health insurers wouldn't necessarily be adverse.

"As we know, a large portion of those choosing to be insured by the Affordable Care Act are lowering insurance company profit margins," Gibbs said Wednesday. "It is feasible that losing some of the tax-credit-dependent customers could actually benefit insurance companies."

In other words, shorting insurance companies in anticipation of an unexpected ruling may not exactly be a slam dunk.

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