Health stocks to watch in GOP's latest Obamacare repeal gambit

By Lewis Krauskopf

NEW YORK (Reuters) - Health stocks are highly sensitive to news about regulatory and legislative change. This week is another test with the latest Republican effort to repeal President Barack Obama's signature healthcare law.

The overall S&P 500 healthcare sector <.SPXHC> has underperformed the broader stock market in the past two weeks as Senate Republicans seek to generate enough support to overhaul Obamacare with their latest bill, known as Graham-Cassidy.

The sector rebounded somewhat on Tuesday as odds for the bill's passage appeared to diminish after a key senator opposed it. The Senate faces a Saturday deadline because of an expiring rule that lets the Republican healthcare legislation pass with just a simple majority.

Here are the main stocks expected to move most from news over the Republican repeal efforts:

HOSPITAL OPERATORS

Throughout the year, the ups and downs of Republican repeal efforts have swayed shares of U.S. hospital companies such as HCA Healthcare Inc (NYSE: HCA) and Tenet Healthcare Corp (NYSE: THC). Those stocks benefited from Obamacare's coverage expansion by reducing the companies' unpaid patient bills, including by expanding the Medicaid government program for low-income Americans, so the repeal proposals have generally been viewed as negative for hospital stocks.

Graham-Cassidy repeals enhanced federal funding for the Medicaid expansion beginning in 2020 and limits spending through a per capital cap. It also adds uncertainty by providing Medicaid funding through block grants to states that allows them to implement their own rules.

"The Graham-Cassidy bill is looking to reduce funding for Medicaid in the longer term. That is a benefit that we have seen improve the earnings outlooks for these hospitals," said Jefferies analyst Brian Tanquilut.

The proposal also repeals the requirement that individuals buy insurance or pay a fine, known as the individual mandate, which also could reduce insurance coverage, hurting hospitals.

One possible positive for hospitals could be the bill's increase of funding to states that did not previously expand Medicaid under Obamacare, where some publicly traded hospital companies have facilities, said Ipsita Smolinski, managing director at healthcare research consulting firm Capitol Street.

HEALTH INSURERS

Like hospital stocks, shares of Medicaid-focused insurers such as Centene Corp (NYSE: CNC) and Molina Healthcare Inc (NYSE: MOH) stand to feel pressure should the legislation appear on track for approval.

“The perception would be fewer members on Medicaid and therefore less revenue,” said Les Funtleyder, healthcare portfolio manager at E Squared Capital Management. But Funtleyder said one benefit could be if the Medicaid block grants to states lead them to seek more services from the companies.

Shares of bigger, more diversified health insurers such as Anthem Inc (NYSE: ANTM) and UnitedHealth Group Inc (NYSE: UNH) have generally been more immune to news involving Obamacare repeal efforts this year, in part because they have largely pulled back from offering plans in the Obamacare individual health insurance exchanges.

But Smolinski notes that while prior Republican repeal bills sought to roll back an industry fee - which was seen as positive for insurers - the Graham-Cassidy bill does not end that fee. At the same time, these larger insurers have significant Medicaid businesses, and the bill leaves Medicaid funding uncertain after 10 years.

“If you think about them with regard to the Medicaid business, then that’s probably a little bit of a headwind for them," Smolinski said.

MEDTECH AND THE BROADER SECTOR

The proposal repeals a tax on medical device manufacturers, seen as providing a modest boon for companies such as Medtronic Plc (NYSE: MDT), Stryker Corp (NYSE: SYK) and Boston Scientific Corp (NYSE: BSX).

“They are the only industry that got relief here,” Smolinski said.

Overall, the passage of the bill could revive regulatory uncertainty over the broader healthcare sector, which hurt its performance ahead of the U.S. election last year. Through Monday, the healthcare sector had climbed 18.2 percent in 2017, topping the 11.5 percent rise for the overall S&P 500 <.SPX>.

“If investors start worrying about what comes next or implementation issues, you could see a rotation into other sectors,” Funtleyder said.

(Additional reporting by Michael Erman; Editing by Jonathan Oatis)

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