These stocks will move when the Supreme Court rules on Obamacare

If the Supreme Court overturns a key provision of the Affordable Care Act, political turmoil will grip Washington. At least one sector of the financial markets could quake as well.

The healthcare industry has been a big beneficiary of Obamacare, as the ACA is known, since the law has extended healthcare coverage to more than 16 million Americans who didn’t have coverage before. For hospitals, insurance companies, drugmakers and pharmacies, those are new customers with money to spend—in many instances backed by subsidies provided by the government.

The Supreme Court is poised to rule on a case, King v. Burwell, that challenges the validity of those subsidies in 34 states that rely on the federal healthcare exchange to administer Obamacare, instead of running one of their own. The case hinges on a technicality of the law, but if the justices side with the plaintiffs, it would substantially raise the cost of insurance for Obamacare enrollees in those states, resulting in an estimated 9.6 million people canceling their coverage. That would be 9.6 million fewer people paying for doctor visits, hospital care, medical tests and prescription drugs.

There are many what-ifs surrounding the case, which the Supreme Court will rule on by the end of June. If the court overturns the subsidies, states could get around the problem by establishing their own exchanges, or Congress could extend the subsidies by passing a new law. But there would be confusion and unpredictability for weeks or months, as politicians debated options.

“If the subsidies get cut down, there will be a knee-jerk response down in the markets, as often happens,” says Les Funtleyder, author of Healthcare Investing and portfolio manager at E Squared Asset Management. “Hopefully, cooler heads will prevail, although politics is unpredictable.”

The stocks to watch are in four healthcare subsectors:

Hospital chains have been big winners under Obamacare, which means they could suffer most if part of the law is dismantled. Motif Investing, which organizes stocks into groups based on macro-investing themes, has an “Obamacare motif” that includes hospital firms such as HCA Holdings (HCA), Universal Health Services (UHS) and Healthsouth (HLS). Those stocks have all soundly outperformed the S&P 500 during the last five years, with HCA, the nation’s biggest hospital chain, up 47% during the last 12 months alone. And there’s been no pullback during the last couple of months, suggesting investors aren’t particularly worried about a court ruling that could dent revenue.

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Pharmacies are another big component of Motif’s Obamacare basket of stocks, with CVS Caremark (CVS) and Express Scripts (ESRX) the biggest players. Those stocks have also outperformed the broader market during the last several years, suggesting they, too, could be knocked lower by an adverse Supreme Court ruling.

Health insurers have also routed the S&P 500 during the last year, helped by millions of new customers getting government aid paying their premiums. Leading firms are now engaged in shotgun merger negotiations, as United Health (UNH), Anthem (ANTM), Aetna (AET), Humana (HUM) and Cigna (CI) negotiate various takeover scenarios that could reduce the big five to four or three. Investors may have to assess the impact of merger mania and a Supreme Court smackdown at the same time, which could make these shares unusually volatile.

Drugmakers have a stake in Obamacare, too, though the biggest firms are global and less susceptible to changes in any one country. Generic drugmakers such as Taro (TARO) and Sagent (SGNT) could suffer, though they’ll also continue to benefit from intensified pressure to control costs throughout the healthcare system.

Some firms, by contrast, would benefit from the unwinding of Obamacare. Motif has a “Repeal Obamacare” basket of stocks, which includes diagnostic companies such as Laboratory Corp. of America (LH), Bio-Techne (TECH) and Quest Diagnostics (DGX). Those firms have to cope with a provision of the ACA that lowered reimbursement rates for their tests under Medicare, so in theory revenue might rise if the ACA were zeroed out. And medical device companies such as Baxter (BAX) and Medtronic (MED) had to pay a new tax under the ACA, so they’d be better off if that were rescinded. Still, the Supreme Court is reviewing just one narrow portion of Obamacare, not the whole thing, and the abolishment of 34 state exchanges isn’t the same as total repeal.

Besides, longer-term trends may benefit healthcare providers regardless of what happens with Obamacare. Baby boomers are hitting retirement age and requiring more care as they get older, generating a rosy outlook for many providers. The improving economy means more people have jobs and the income required to pay for care (even if you have insurance). And even Republicans who hate Obamacare and have called for its repeal may have to come up with stopgap measures to keep the bulk of the program in place if a Supreme Court decision leads to public uproar. “We think either way, Burwell will look like a blip as we move forward,” says Funtleyder. Healthcare shareholders surely hope so.

Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman.