With the passing of the Patient Protection and Affordable Care Act in 2010, also known in shorthand as Obamacare, lawmakers and President Obama ushered in the winds of change in the health-care industry. Having witnessed the successful implementation of socialized and subsidized health care in Canada and Switzerland -- and seeing the average health-care premiums paid by employers and individuals rise by 62% and 82%, respectively, from 2000 to 2010 -- the time had come in 2010 to make sweeping reforms... and the PPACA was it!
Both sides of the aisle have presented very convincing and heated arguments over the past couple of years about why Obamacare is right or wrong for America. It nearly didn't make it into law when the constitutionality of its individual mandate, as well as other aspects of the bill, was brought into question in the highest of all U.S. courts -- the Supreme Court – last year. However, in June the Supreme Court ruled in favor of upholding the validity and nearly all aspects of the PPACA, paving the way for its full implementation by 2014.
Whether you're for or against Obamacare, it's clear that advantages and disadvantages exist. Today, I plan to focus on the advantages of Obamacare and lay out five ways that it will succeed in bettering our health-care system. (Click here to read about five areas where Obamacare appears destined to fail.)
1. It will reduce hospitals' exposure to doubtful accounts.
Under our current system, no one is required by mandate to carry insurance. This means that any of the 48.6 million uninsured Americans as of the end of 2011, according to the U.S. Census Bureau, could walk into a hospital and receive stabilizing treatment in an emergency room since public hospitals can't turn away people in need of care, regardless of their financial status.
Unfortunately for many hospitals, this has exposed them to a rather large annual provision for doubtful accounts (those accounts where treatment is given but payment goes uncollected). In 2012, HCA Holdings (NYSE: HCA ) , the largest hospital operator in the U.S., generated $36.8 billion in revenue, but set aside $3.77 billion, or 10.25%, for doubtful accounts. The smaller rival of HCA, Tenet Healthcare (NYSE: THC ) , set aside less on a percentage basis in 2012, just 7.9% of total revenue. But it also saw its provision for doubtful accounts rise by nearly 10% year-over-year.
Obamacare will solve the majority of this problem by mandating that employers with more than 50 employees provide health-care solutions to their employees, and that individuals and small business with fewer than 50 employees get health insurance either themselves or through their state's insurance pool. With fewer uninsured and underinsured people walking into hospital emergency rooms, hospitals will be setting significantly less aside for doubtful accounts and should ultimately see a boost to their bottom line. This boost in profits could be used to reward shareholders through share repurchases or a dividend payout, but, in all likelihood, it could be used to buy state-of-the-art medical equipment that will help differentiate their hospital from peers and improve the quality of patient care.
2. It will bring 16 million previously uninsured Americans under the Medicaid umbrella.
The Congressional Budget Office and Joint Committee on Taxation put their heads and estimates together in a July 2012 report and have concluded that the net result of Obamacare will expand insurance to up to 30 million people by the end of the decade. The more important figure I see is the 16 million currently uninsured lower income individuals who will be brought into the fold under the Medicaid expansion.
The Medicaid expansion -- which will completely pay for the lowest income earners while subsidizing those who make up to 400% of the Federal poverty level -- will be financed by a combination of higher taxes on upper income earners and the medical device excise tax, which is a 2.3% tax of total revenue for medical device makers.
Insurers with little exposure to government-run Medicaid have been making big bets that a steady stream of newly insured people will translate into big profits. WellPoint (NYSE: ANTM ) , for instance, ponied up $4.46 billion in cash to buy Amerigroup in July in order to become the largest Medicaid company by membership, surpassing UnitedHealth Group. The 43% premium paid for Amerigroup was astoundingly expensive, placing the company at more than 18 times forward earnings, but should add $1 per year in EPS by 2015. However, I feel this speaks more to the growing quality of care that lower income earners will be soon be able to receive since many, due to the high costs of premiums or through their employers, had been shut out of the health-care system.
3. It will cap insurers' profits and require them to spend 80% of premium costs on health-care services.
In years past, the ability of insurers to raise premium costs was predominantly at their own discretion. By raising premiums, insurers certainly ran the risk of scaring off its members -- or prospective members -- to competing insurers, but this was rarely the case. Similar to how property and casualty insurers operate by hiking premiums after a large catastrophe loss, health insurers used similar methods, such as higher health-care and drug costs -- and one need only look at the high price of orphan drugs like Alexion Pharmaceuticals' Soliris, which is tipping the scales at $400,000 for a full year of treatment -- to garner huge premium hikes.
Those big premium hikes could be a thing of the past with the PPACA capping their profit with the implementation of the 80/20 rule. For starters, it disallows insurers from raising their premiums just for the sake of profit and requires insurers to explain to the state (or states) why a premium hike of more than 10% is justified.
More importantly, Obamacare will require insurers to spend at least 80% of patient premiums on actual health-care services and will cap administrative expenses at 20%. This means that if insurers fail to spend at least 80% of their premium revenue on member health-care services, that it must write a check for the difference to members. In August, for instance, insurers were required to return $1.1 billion in premium payments to approximately 12.8 million members. Simply put, if you pay for a service you should get the rewards that come along with that service. The 80/20 rule will ensure that will happen!
4. It will expand the benefits of the average health plan.
The sands of time are definitely ticking on individual health-care plans, which, in some cases, offer nothing more than bare-bones coverage. According to a study done by the University of Chicago, about 50% of all individual plans will be inadequate in terms of the benefits they are required to provide under the PPACA, and will either disappear or evolve by the time it's implemented in full in 2014.
Released in February, the Obama administration outlined 10 key benefits that will be required under the PPACA in health-care plans, including hospitalization, prescription drugs, maternity, and newborn care. With these benefits becoming a requirement under Obamacare, hospitals will be further shielded from doubtful/non-covered procedures and medications, and patients will have a broader scope of treatment options available to them. The point being that health-care members will be prepared for a myriad of ailments should they strike rather than merely jumping into the system when they get sick.
Another key point is that the PPACA disallows insurers from discriminating against patients with pre-existing conditions. Broad coverage will ensure all those who want health-care will be well-covered.
5. It will promote preventive health-care visits and should therefore reduce long-term care costs.
I believe one of the least talked about and most elusive benefits of bringing in up to 30 million people into the health-care system over the next decade is the amount of savings that will occur from an increase in preventative visits.
Broader health-care coverage in terms of individual plans, coupled with a Medicaid expansion expected to bring almost 16 million Americans under the Medicaid umbrella by 2014, gives previously uninsured individuals access to preventative medical care that didn't previously exist. The most obvious beneficiaries from a financial perspective under this scenario are diagnostic companies and preventative medication suppliers.
General Electric (NYSE: GE ) , a conglomerate known best for the industrial side of its business, would likely be a beneficiary as its MRI and CT scanners could be more regularly used in preventative cancer detection. Likewise, prescription drugs like AstraZeneca's (NYSE: AZN ) Crestor, used to treat high cholesterol, should benefit as a preventative treatment to curtail the high risks of heart attack, stroke, and heart disease that come along with a high cholesterol diagnosis.
The end result of better preventative care should be fewer serious complications requiring expensive hospitalizations. With half of all health-care costs being spent on just 5% of the population, according to the Kaiser Family Foundation, keeping even a small percentage of the high health risk population healthier through regular preventative visits could mean billions of dollars in savings.
I've also examined the other side of the coin, pointing out five ways where Obamacare will fail.
The Motley Fool's chief investment officer has selected his No. 1 stock for the next year. Find out which stock it is in the brand-new free report: "The Motley Fool's Top Stock for 2013." Just click here to access the report and find out the name of this under-the-radar company.