The Chaos That Overturning Obamacare Could Cause

The debate over the Affordable Care Act, or Obamacare, has reached the Supreme Court, and soon our nation's top justices will decide its constitutional fate -- in particular, its individual mandate. There are passionate arguments for and against Obamacare and the individual mandate, but as investors, what we should be worried about is how the ruling could affect our investments.

The outcome of the court decision and Congress' reaction is unknown for now, but if the individual mandate is struck down, it could be terrible for one industry, which might surprise you.

The theory behind Obamacare
The Affordable Care Act is built on the thesis that if everybody is in the health-care system, it will bring down costs for everyone. An analogous, although far less complicated, system is car insurance. Everyone who drives is required to have car insurance, because if some drivers don't have car insurance, it raises costs for everyone else.

If I get in an accident with someone who has car insurance, the insurance companies pay for the damage, minus deductibles. The amounts for both sides are negotiable, but as an overall system this is efficient, because there's not a lot of wasted cost.

In another example, if I get into an accident with someone who doesn't have car insurance, the problem becomes much more complicated. If it's the other person's fault, and he's responsible for the damages, he could choose not to pay, which would leave me or my insurance company to sue that person, costing much more for the system than the original damage.

The same goes for health care. As an overall system, it is more efficient to have everyone get regular physicals, receive preventative care, and avoid filling the emergency room. As it is, the emergency room has become the place for care for millions of Americans who are paying little or nothing into the system to get care. This is the most costly and inefficient way for the entire system to run.

The theory behind Obamacare is that we want everyone in the system paying something, even if we have to subsidize a large percentage of the population, to bring down the overall costs of the health-care system. Whether you have pre-existing conditions, you're perfectly healthy, you're planning on having kids, or whatever -- as long as you're in the system, the costs are spread out and overall costs will be lower than the price of having millions of people getting care in the emergency room.

That's the theory.

What if the mandate is struck down?
If only the individual mandate is struck down, that means the government won't be able to require people to have health insurance or fine individuals or companies if they don't. That decision could send us into a state of chaos, especially if there's no backup plan as President Obama said this week.

If insurers were still required to take any new customer, regardless of pre-existing conditions, what benefit will there be to having insurance? As a contractor who has to buy his own insurance, I'll have no reason to get any. I haven't been to a hospital or clinic in seven years, so my cost has been zero, and if I get deathly ill I can sign up for insurance on the way to the hospital and get care as if I'd been a card-carrying insurance member for life.

That outcome would throw costs out of whack for the system, and it would create chaos for insurers and consumers. Those who chose to have insurance all the time would have to pay for people like me, who could choose to be parasites on the system, raising rates to even higher levels.

And how would UnitedHealth Group (NYSE: UNH  ) , WellPoint (NYSE: WLP  ) , and Aetna (NYSE: AET  ) predict costs in a system where customers come and go on a whim? Insurance premiums are based on expected costs for a group of patients, but if patients come to insurance companies only in their greatest time of need, it would throw off any existing models.

Companies would lose an incentive to insure workers as well. McDonald's (NYSE: MCD  ) has already tried to find ways around the mandate, asking regulators to waive part of the law for the company, and the elimination of the mandate would allow more companies to cut benefits.

Most Americans still get insurance through work, and a fine of employers for not providing insurance would have at least encouraged that system to continue. If the individual mandate is overturned, what's to keep companies from dropping insurance all together, especially if costs go up?

The land of unintended consequiences
Conservative CNN contributor David Frum predicted on Monday that this outcome would eventually lead to an actual government takeover of health care, as Medicare and Medicaid costs skyrocketed and insurance premiums rose. The spiraling costs would lead the government to act by taking over the system. It's a bold prediction, but I tend to agree -- unless something is done to mitigate the potential chaos that could ensue after the Supreme Court's ruling.

In all of the outrage over the poorly understood Obamacare bill, people often fail to remember that insurance stocks rose after it passed and haven't quit ever since. Coventry Health Care (NYSE: CVH  ) , Aetna, UnitedHealth Group, and WellPoint are all near 52-week highs, and worries over the Supreme Court's eventual decision didn't take hold one way or the other last week. But having more people involved in a stable system is good for insurance, and having fewer people in a chaotic system is bad. If the individual mandate is overturned, I think insurance companies will be the ones that suffer the most.

What do you think? Sound off in the comments section below.

Fool contributor Travis Hoium has insurance, but he has no a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

Motley Fool newsletter services have recommended buying shares of Coventry Health Care, McDonald's, UnitedHealth Group, and WellPoint. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (15) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2012, at 5:29 PM, TheLI0N wrote:

    Maybe congress and the president should have made a better bill in the first place. "You have to vote for it to find out what is in it." I guess maybe to fix it now they will actually have to *gasp* work with republicans to get something that both sides agree with. Imagine that, a novel concept, both sides actually working together for the good of the country.

  • Report this Comment On April 06, 2012, at 6:45 PM, TMFFlushDraw wrote:

    @TheLi0N

    An overturn of the mandate would definitely create a situation where both sides would have to work together. Maybe it would be good for the country? Maybe?

    Travis Hoium

  • Report this Comment On April 06, 2012, at 6:47 PM, MaxTheTerrible wrote:

    If insurance companies would not be able to deny coverage based on "pre-existing conditions", I'd say that individual mandate provision (as it stands right now, anyway) is largely irrelevant, since the penalties for not having insurance are LOWER than premiums. So, unless somebody else pays for your health insurance (employer) there truly is no incentive for an individual to get health insurance.

    BTW, I live in Taxachusetts - the only state with the individual mandate - and right now penalties for not carrying insurance are $1,212/yr for people making more than 30k year, I believe. Try to get any type of health insurance for that price!

    If we want to force everyone to participate in healthcare system penalties for not having health insurance have to be much higher.

  • Report this Comment On April 06, 2012, at 7:52 PM, BMFPitt wrote:

    There's no way they'll sever the mandate. The whole bill must be struck down or not at all. Everyone understands that it would be a government-mandated insurance death spiral, that's what the 3rd day of arguments was about.

  • Report this Comment On April 06, 2012, at 9:44 PM, AvianFlu wrote:

    The chaos caused by ruling that Obamacare is unconstitutional will be minor compared to the massive chaos that will ensue if Obamacare continues to be implemented.

    In other news: "communism only killed 100 million people. Let's give it another chance!"

  • Report this Comment On April 06, 2012, at 11:25 PM, GETRICHSLOW2 wrote:

    First of all, auto insurance was not mandated in order to reduce the cost for everyone. It is required only of those who CHOOSE to drive a car and it is mandated by the STATES, not the federal government, which is very important when it comes to questions of constitutionality. Auto insurance is required to insure those who are harmed or suffer property damage at the hands of another are compensated for those damages. Most states don't even require any coverage for your own health costs or damage to your own vehicle. It is primarily to protect the driver who was not at fault. Attempting to compare this to Obama's healthcare fiasco, which removes all freedom of choice from everyone consuming oxygen within U.S. borders and makes slaves of all of us by forcing us to work to pay the cost of others medical care, is ludicrious.

  • Report this Comment On April 07, 2012, at 1:38 AM, foolishlycuriose wrote:

    Healthcare is a contentious issue that begins by asking and answering one simple question, "What is health?" The WHO has defined health in such a way that it encompasses every aspect of our lives and by extension the economy. While this is true to an extent, it makes creating a system for providing healthcare and funding it all but impossible. The idea of healthcare being an inalienable right was discussed by our founding fathers but ultimately rejected on the grounds that We The People are or rather should be responsible for our actions if we are to have true liberty. That includes taking care of our health including the costs. Milton Friedman, a Nobel economist, proposed the idea of Medical Savings accounts and catastrophic health insurance. His ideas are constitutionally sound and economically vieable. Having experienced both private pay and socialized medicine personally and professionally, I can say unequivocally that third (insurance company) and fourth (government) party intervention in what amounts to a value based consumer decision is what has driven the cost of healthcare through the roof and will continue to do so until or unless more reasonable minds prevail. Imagine having to ask permission and be given approval by a private company and the government to buy a smartphone or to eat our with family or friends. That's our healthcare system today and under Obamacare, you would be obliged to subsidize the smartphone and meal of those who cannot afford to purchase either.

  • Report this Comment On April 07, 2012, at 9:52 PM, DDHv wrote:

    Medical savings accounts make sense. I managed to get into the experimental system.

    The Obamacare system is poorly designed, if the purpose is to improve health or lower medical expenses. As far as I can see, the provision that sets one dollar per person per month aside to pay for abortions is the primary purpose of it.

  • Report this Comment On April 07, 2012, at 11:04 PM, wolfman225 wrote:

    Temporary chaos is far preferable to permanent subservience to an ever-expanding government behemoth. As for the problem of "parasites" draining the system if the mandate is struck, we already have 'em. One solution: require that bills for healthcare stay the responsibility of the patient, similar to Federal student loans.

    If you end up needing serious medical care, you should get it, but it shouldn't be for free. You need surgery? Organ transplant? Develop a chronic condition? Current law requires that you be treated, regardless of ability to pay. However, the law should not relieve you from the obligation to pay. Costs incurred should remain the responsibility of the patient, not the general public. Set up a schedule of payments and pay it off as best you can.

    ObamaCare was never about healthcare. It's major purpose was always to increase government power and to serve as an initial step to government-run, one size fits all, so-called "single payer" healthcare devoid of any personal choice.

  • Report this Comment On April 08, 2012, at 1:20 PM, cmstripling wrote:

    If I knew the government wouldn't mess it up I would gladly pay higher taxes to cover minors and the elderly. But if you're capable of providing for yourself, I don't want to pay for your crap.

  • Report this Comment On April 09, 2012, at 8:01 AM, JuneSmith wrote:

    I am writing in favor of the constitutionality of the individual mandate because everyone eventually needs medical services. Those of us that have insurance now pay for the ones who do not but end up using emergency rooms for free. Therefore, individual mandate IS comparable to the requirement that drivers have insurance.

    The only way you could argue AND IMPLEMENT the pure idea that purchasing health care insurance is simply a expression of economic freedom of choice is to accept the logical consequence that if you do not have insurance you are willing to be flatly denied ANY medical services, unless you can pay up front in the emergency room for the much more expensive care. (For example, my child came down with an ear infection on a Friday night, and that visit cost about $900, vs. had he gotten sick during "regular working hours" the cost would have been about 1/4 of that. And that was a simple ear infection which required a quick doctor exam and a prescription for an antibiotic! Our insurance paid for most of it.)

    Taking the false "choice" argument to its logical end, next to each emergency room you would have to have a "Suffering and Dying Facility" (SDF) to make sure that the uninsured who can not pay up front do not freeload on the rest of us. Imagine that a person is struck by a car. Conscious or not, upon entering an emergency room, s/he would have to prove that s/he has insurance or could pay for service up front. If s/he had no insurance or ability to pay, s/he would be asked to make one of only two available choices: (1) go to SDF or go home (somehow). (Sounds like an inhumane social Darwinism, but, hey, it was their CHOICE - right?!).

  • Report this Comment On April 09, 2012, at 8:38 AM, Danl48 wrote:

    Most of these who are opposed are idiots who listen to fox bulls**t news service, which is nothing but propoganda fed to the dumbest people in the country.

  • Report this Comment On April 09, 2012, at 10:54 AM, Stocklovr wrote:

    Most people forget that we already have two government run healthcare solutions. Medicare and Medicade. There was absolutely no need to write yet another law when all congress needed to do was fix/enhance these two laws.

    Don't kid yourself, the new law was designed to be a government takeover for total control of healthcare and, while some of it is good, much of it stinks. Lots of "exceptions" have been granted and some are built right into the law. If it's so great, why do they hand out exceptions?

    My real sticking point is that congress created this "great" law then "excluded" themselves... there is only one reason for that. If it was a great deal for everyone, they would have wanted a piece. They are evidently telling us that it is beneath them but great for the rest of us peasants.

    Throw it all out and come up with something that gets support from both sides... not something that the controlling party pushes through.

    If it's a mess as the author suggests... well, just another example of our fine government at work. The real problem is that the fix to the problems they create are usually worse than the original problem.

  • Report this Comment On April 09, 2012, at 3:53 PM, sleeann24 wrote:

    as you correctly, yet briefly point out, the shear fact of everyone having health insurance will not in and of itself bring healthcare costs down, people have to actually use their insurance for annual physicals, and preventative health and wellness services.

    the penalty for not signing up for insurance would need to be an actual penalty, not a nuisance. I do agree though that if the mandate is struck down and the rest of the ACA stands, the scenario of calling and buying health insurance is a realistic proposition - although an expensive one. my guess is that there would end up being some sort of waiting period between buying and availability of use - kind of like the 10 -day waiting period to buy a handgun.

    the ACA isn't perfect, but no bill is - we need to do something. Hospitals are trying to plan for their futures and the uncertainty around the ACA forces us to plan, project and do it all over again for different scenarios - and that wasted time and rework raises the cost of healthcare.

    to the point of the article - health insurance companies may suffer a bit - but with their record setting profits as of late, i for think they could afford a bit of suffering.

  • Report this Comment On April 09, 2012, at 7:57 PM, wolfman225 wrote:

    <<"to the point of the article - health insurance companies may suffer a bit - but with their record setting profits as of late, i for think they could afford a bit of suffering.">>

    You think so? Just what is it about the behavior of any business that makes you think they will accept any amount of imposed "suffering"?

    Just as no corporation ever pays income taxes, no insurance company will suffer losses quietly. The former passes on any increase in costs due to higher taxation to the end consumer and the latter will declair bankruptcy and go out of business if the losses begin to mount. This will inevitably force more people onto the government provided services of Medicaid and Medicare, both of which are severly overused and underfunded. They also have the problem of fewer doctors being willing to accept new Medicare/Medicaid patients because of the ridiculously low reimbursement rates.

    The ACA exacerbates the problem by adding as many as 10M people to the government insurance roles while making no provision for additional doctors & other healthcare providers, Inevitably resulting in longer wait times and less time spent in consultation between patient and doctor.

    Aside from issues of constitutionality and the underhanded measures used to pass the bill, it's simply a poorly thought out, badly crafted law and should be repealed, with a new law crafted in full transparency with the full involvement of both sides of the aisle and the input of the American people. The first requirement should be that any law passed should be enforced first upon legislators and government employees.

    If it's good enough for us, it's good enough for them to prove to us it works. First.

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