What: Shares in Tenet Healthcare Corporation (NYSE:THC) jumped by over 10% earlier today after the Supreme Court ruled in favor of Obamacare, keeping subsidies intact and limiting the risk of a spike in bad debt expense at the company.
So What: Plaintiffs in the King v. Burwell case argued that a strict reading of the Affordable Care Act only allows for subsidies in states that have set up their own exchange.
Today's move reflected a sigh of relief from investors in hospital stocks. If the case had gone the other way and the Supreme Court had agreed with the plaintiffs, it would have eliminated subsidies for 6.4 million people living in 34 states who had signed up for health insurance through the federally-run healthcare.gov.
Since an elimination of subsidies would have caused monthly premium payments to increase substantially, many of these subscribers would have likely canceled their health insurance plans.
If so, then hospital operators like Tenet Healthcare Corporation could have seen their bad debt expense, or the amount of money that they have to write-off that is tied to caring for the uninsured, spike higher.
Now What: Bad debt expense equates to billions of dollars annually for the industry, and the impact on Tenet Healthcare Corporation could have been significant.
In the first quarter, Tenet Healthcare Corporation reports that its bad debt expense for charity care totaled $174 million, down from $221 million last year, and that its uncompensated care expense fell to $537 million from $601 million a year ago. For comparison, prior to the implementation of the Obamacare health insurance exchanges, charity and uninsured admissions in Q1 2013 equaled 6.8% of all admissions, but in Q1 2015 they represented just 5.2% of all admissions.
Since the Supreme Court ruling eliminates a big risk, its not surprising that shares in Tenet Healthcare are moving up. However, investors might want to be patient instead of chasing it higher. After all, stocks don't climb in a straight line and that could mean that a pullback down the road offers a more attractive opportunity to pick up shares.
Todd Campbell has no position in any stocks mentioned. Todd owns the equity research firm E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.