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Earlier today, the Supreme Court issued its ruling on the Patient Protection and Affordable Care Act (aka Obamacare), finding in favor of the constitutionality of the bill by a vote of 5 to 4, and effectively silencing months of partisan back-and-forth bickering.
Today’s ruling, outside of having huge political and personal implications, also holds an important role in dictating the future of the health-care industry. Whereas upholding the ACA can be seen as a benefit for hospitals, Medicaid health-plan providers, and low-to-moderate income individuals who will be eligible for the expansion of government-sponsored Medicaid, the bill was decidedly negative for health insurers and the medical device sector.
Insurers earnings capped
Although the individual mandate, which requires all citizens to purchase health insurance, does add certainty to an industry that loathes uncertainty, insurers are going to have a difficult time growing their bottom lines, despite the influx of new customers.
At the heart of insurers’ dilemma is the fact that they’ll no longer be able to reject citizens with pre-existing conditions. In addition, insurers will be required to spend a minimum of 80% of patients’ premiums on medical care, or else they’ll be forced to send rebate checks to those people. Most insurers spend considerably more than 20% on administrative expenses, so many will be forced to tighten the reins on expensing. Finally, Obamacare will make it difficult for insurers to raise prices without reason. Health-insurance prices are still expected to rise, even with the passing of Obamacare, but frivolous price hikes are no longer possible.
That’s bad news for health insurers UnitedHealth Group (NYSE: UNH ) and Humana (NYSE: HUM ) , but is particularly damaging to WellPoint (NYSE: WLP ) , which is most exposed to small group and individual businesses. Obamacare essentially puts an earnings cap on this sector, leaving it with few avenues to increase profitability.
They took your job!
Medical device makers also come out of today’s decision as decisive losers, because of the medical device tax, which is set to go into effect in January. The tax, which is levied on 2.3% of a company’s total revenue and is being enacted to help pay part of the cost of expanding Medicaid, is largely expected by industry leaders to reduce research and development budgets, result in layoffs, and move jobs overseas.
Boston Scientific (NYSE: BSX ) , which employs 24,000 globally, announced that it would be laying off 1,200 to 1,400 people globally (including U.S. jobs), but also announced a $150 million investment in China that will create 1,000 jobs there.
As I highlighted last week, NuVasive’s (Nasdaq: NUVA ) CEO, Alex Lukianov, even went so far as to write a commentary in the San Diego Union Tribune highlighting the damage that the medical device tax and Obamacare will do to his spinal device company. Mr. Lukianov notes that 100% of R&D is currently done within the U.S., and 90% of all manufacturing. However, he predicts that he’ll need to layoff 200 of his 1,500 employees in 2013, and potentially move parts of his R&D and manufacturing process to more tax-favorable countries in response to Obamacare’s passing.
The effect on earnings may not be huge, but with large pharmaceutical companies shedding workers left-and-right in order to cut costs, the last thing the health-care sector needs is additional expense-reducing layoffs in response to Obamacare.
The Supreme Court upholding the individual mandate came as a shock to many Wall Street pundits. But what isn’t a shock is the negative effect the bill stands to effect on the medical device sector and insurers. It’s far too early to tell what sort of impact Obamacare will have on earnings, but there’s simply no way to construe today’s events as good news for these two sectors.
Clearly there’s a lot of information to digest, given today’s Supreme Court ruling, and we at the Motley Fool will continue to provide coverage of the ins and outs of how it may affect you and your money over the next few days. Stay tuned for more Foolish coverage.
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