Healthcare investors have found their favorite election wager: hospital operators.
But they would do well to remember what happened the last time an opposition party won the House vowing to roll back a president's healthcare agenda.
Prediction markets give Democrats heavy odds of recapturing the House on Tuesday, with the Senate hanging in the balance. The bet is that a Democratic win will bring relief to hospitals battered by Washington's Medicaid cuts and the lapse of enhanced Obamacare subsidies.
Hospital stocks have had a big run. Since June 1, Tenet Healthcare is up 61%, HCA Healthcare has advanced 28% and Universal Health Services gained 22%, while the S&P 500 has barely budged.
Tenet's gains rest in large part on strong earnings from its surgery-center business. The other two have climbed despite bad news. Last week HCA guided for flat earnings next year, while UHS delivered lower quarterly profits. Yet investors haven't shied away: HCA now trades at about 15 times forward earnings and Tenet at 13 times, both above their five-year averages, according to FactSet data. (Some of the more recent gains are also being driven by a rotation into defensive stocks.)
Hospitals could use the help. Trump's "big, beautiful bill" will soon begin imposing Medicaid work requirements and more frequent eligibility checks. In 2028 it will begin phasing down extra Medicaid payments many states funnel to hospitals. Separately, Congress let enhanced Obamacare subsidies lapse at the end of last year, pushing millions of people out of their plans. Many still get sick and show up at emergency rooms unable to pay. HCA said last week that lost Affordable Care Act exchange coverage cost it about $400 million in pretax income in the third quarter.
But here is the flaw in the hospital trade. Flipping the House, or even both chambers, won't deliver President Trump's signature. Chris Meekins, a Washington policy analyst at Raymond James, points to the 2010 midterms, when Republicans won the House promising to repeal the Affordable Care Act. They voted dozens of times to repeal it. When a repeal bill finally reached President Barack Obama's desk in 2016, he vetoed it.
"The only way Democrats repeal some of the provisions is if Trump feels like he has to cave to them, and when has he ever done that?" Meekins said. A healthcare grand bargain, he said, is "TV show 'West Wing' writer thinking, not actual real-world D.C. thinking."
A Democratic victory on Tuesday would give the party leverage. Government funding runs out Dec. 11, but that deadline falls to the current Republican Congress. Meekins expects lawmakers to pass a stopgap extension through around February, leaving the new Congress to threaten a shutdown. Democrats tried last fall to extend the enhanced Obamacare subsidies, triggering the longest shutdown in U.S. history, and the subsidies expired anyway.
Even if a deal does come, any relief for hospitals would likely be narrow. Meekins puts the odds of delaying Medicaid work requirements or eligibility checks below 15%. The best chance, he says, is a one-year delay in the phase-down of supplemental hospital payments, which he puts at about 40%.
That doesn't mean the trade can't keep working in the short term. A Democratic sweep on Tuesday could give one more bump to hospitals and insurers exposed to ACA and Medicaid. But at current valuations, hospital stocks are leaving little room for disappointment. Bernstein analyst Lance Wilkes, who is more optimistic about a compromise, wrote that the potential relief for hospitals appears to be reflected in their current multiples.
Should Congress strike a deal, Wilkes thinks Medicaid insurers such as Centene and Molina could benefit more. Their revenue depends directly on how many people remain enrolled, and investors expect Medicaid rolls to shrink as work requirements take effect. A delay would leave the insurers with more members than Wall Street expects and a healthier mix, since those most likely to lose coverage tend to be the people who use the least care.
Investors buying hospitals are betting on compromise in Washington. These days, that is a brave bet.