Health-care stocks plunge after federal judge rules Obamacare unconstitutional

  • Hospital and health insurer stocks plunged after a federal judge ruled the ACA unconstitutional.
  • U.S. District Court Judge Reed O'Connor of Texas issued the decision late Friday.
  • The lawsuit was backed by the Trump administration and is likely to be appealed.
President Barack Obama
Jewel Samad | AFP | Getty Images
President Barack Obama

Hospital and health insurer stocks plunged Monday after a federal judge in Texas ruled former President Barack Obama's signature health law, the Affordable Care Act, unconstitutional.

Shares of HCA Healthcare, the largest for-profit U.S. hospital operator, fell 2.9 percent Monday. Shares of insurer Cigna closed down 3.3 percent. Health-care service company Centene slid 4.7 percent, managed health company Molina Healthcare plunged 8.9 percent and Tenet Healthcare fell 6.8 percent.

The Health Care Select Sector SPDR (XLV) fell 2 percent.

U.S. District Court Judge Reed O'Connor of Texas issued the decision late Friday. He declared that key portions of the ACA, more commonly known as Obamacare, were inconsistent with the U.S. Constitution. O'Connor's ruling argued that the health-care law cannot stand on its own since Congress last December repealed the individual mandate, which imposed a tax penalty on consumers who went uninsured.

The mandate, which remains in effect for 2018, was a key part of the ACA legislation. The mandate is the greater of $695 per adult, or 2.5 percent of household income.

Matt Borsch, health-care analyst at BMO Capital, said he sees Friday's decision as a buying opportunity for health-care stocks because he thinks the decision will likely be overturned on appeal.

"As we expect that this matter will be resolved within a 12-month window, we have elected to maintain our target prices," he told clients in a research note Monday.

The lawsuit was backed by the Trump administration and is likely to be appealed — which could mean the legislation will be heard anew by the Supreme Court, which upheld Obamacare in a narrowly divided 2012 ruling.

A Centers for Medicare and Medicaid Services spokesperson told CNBC, "The recent federal court decision is still moving through the courts, and the exchanges are still open for business and we will continue with open enrollment. There is no impact to current coverage or coverage in a 2019 plan."

Ana Gupte, Leerink Partners senior health care services analyst, also expects the ruling to be overturned and sees a buying opportunity for investors. "HCA is a strong buying opportunity in the hospital subsector," she said.

The ruling came hours before the ACA's final open enrollment day to get health coverage next year. Sign-ups on the federal health insurance marketplace have been low this season, tumbling 11.7 percent from the same time last year, according to the latest figures from CMS.

President Donald Trump, who has long opposed Obamacare — and failed to rally the GOP behind an effort in 2017 to repeal and replace it — late Friday applauded a federal judge's ruling. He also called on Congress to replace the current law with a new bill.

The American Medical Association called the ruling "an unfortunate step backward for our health system" and warned the decision could "destabilize health insurance coverage."

"No one wants to go back to the days of 20 percent of the population uninsured and fewer patient protections, but this decision will move us in that direction," AMA president Barbara L. McAneny said in a statement.