Investors are betting that the healthcare sector's strong run will not be held back for long even if the U.S. Supreme Court rules against the Affordable Care Act.
The court will meet next on Monday, though may not issue a ruling on King v. Burwell, a challenge to President Barack Obama's signature healthcare reform legislation, until later this month.
At issue are the tax credits that help about 6.4 million low- and moderate-income Americans buy insurance. If the Court rules against the credits, millions of Americans may find they cannot afford their insurance. This could affect the health insurers as well as hospitals and other providers that benefited from Obamacare's expansion of the number of people with healthcare coverage.
The court's vote is expected to be close, but so far investors seem bullish.
"Option activity over the last few weeks in hospital stocks suggests that the options market is betting on a post-Supreme Court decision rally," said Anshul Agarwal, equity derivative strategist at Bay Crest Partners in New York.
Even if the subsidies aren't upheld, some expect that political pressure will motivate lawmakers to quickly come up with an alternative for people affected and hope the court would stay enforcement of a ruling until a solution is in place.
A negative ruling for Obamacare could result in an immediate selloff of healthcare stocks, but it will be short lived, said Sven Borhos, founding general partner at OrbiMed Advisors in New York, which invests in healthcare stocks including HCA Holdings Inc (HCA.N). "People will want to buy the dip," he said.
Companies in the spotlight include hospital operators such as HCA, Tenet Healthcare (THC.N), Community Health Systems Inc (CYH.N) and LifePoint Health Inc (LPNT.O), and insurers including UnitedHealth Group Inc (UNH.N), Humana Inc (HUM.N), Anthem (ANTM.N), Aetna Inc (AET.N), Molina Healthcare Inc (MOH.N) and WellCare Health Plans Inc (WCG.N).
As the ruling nears, investors have been pushing up those stocks. HCA has risen more than 18 percent while Tenet is up 11.8 percent and Community has gained 10.4 percent since the close of trading on March 3, the day before the court heard arguments on the case.
Many health insurance companies have also moved higher in the same timeframe with Aetna up 18.1 percent, Anthem rising 12.3 percent, and Molina up 11.4 percent.
The S&P health care index .SPXHC is up 9.6 percent so far this year, making it the top performing S&P 500 sector.
The iShares U.S. Healthcare Providers exchange-traded fund (IHF.P) has also done well, with much of the upside action coming since March 3. The fund is up 8.9 percent since then and 16.8 percent year to date. It has also seen inflows of $204.35 million in 2015, according to data from ETF.com, with $144.61 million of that coming since March 3.
Regardless of how the ruling goes, some of these stocks could move significantly right after the news. Options activity has surged for some of these names as traders position themselves for greater volatility.
For Tenet, HCA Holdings, and Community Health Systems, the 30-day implied volatility, a gauge of the risk of a big move in the stock, has jumped dramatically since March 4, when the Supreme Court heard arguments on the case.
The uptick in options activity at Tenet Healthcare, the third-largest U.S. for-profit hospital chain, is by far the most noticeable. Open interest is at 136,000 contracts, up 85 percent from March, and most of the increase is driven by activity in calls, usually used for making upside bets.
Open interest in calls has nearly tripled to 93,000 contracts compared with a mere 9 percent increase in open interest in puts.
Calls banking on the shares rising north of $55 by mid-July represent the biggest block of open interest. Tenet shares were at $52.63 on Thursday.
Bullish action would continue the group's trend so far this year, with Humana, Hospira and Cigna all among the S&P 500's biggest percentage gainers in 2015.
"While there is a lot of expectation for a big move in these stocks, there is little evidence of hedging the move to the downside," Agarwal said. "This might result in sharp selloff in case the decision goes against these companies."
