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.