Obamacare could implode. I'm not saying that it will implode, and in fact this isn't likely to happen. However, the possibility does exist. Here's how it could happen -- and what the aftermath would be if it did.
Source: Wikimedia Commons.
How it could happen
While there are multiple ways that the ACA could fall apart, three stand out in my view as the most plausible paths. And each ties in with a different branch of government.
Time magazine's Joel Klein wrote about one way that Obamacare could fail in his story from April 2 titled "Obamacare Incompetence." Klein noted the problems in implementing the health insurance exchanges that are a critical component for small businesses. His argument was that Obamacare will fail if more attention isn't paid to the "details of implementation" by the administration.
The legislative branch of government could still cause the ACA to crumble, even without an outright repeal of the law. The Department of Health and Human Services is scrambling to cover the costs of implementing exchanges for 26 states that decided not to setup their own exchange. HHS asked for nearly $1 billion from Congress for this purpose, but that request didn't meet with much sympathy.
HHS Secretary Kathleen Sebelius has enough discretionary options at her disposal to keep things rolling for now. However, at any point in the future, Congress could effectively dismantle the exchanges by not funding them. If the exchanges go by the wayside, Obamacare unravels.
The Supreme Court's role in deciding the fate of the ACA probably isn't over despite last year's ruling. Multiple cases are winding their way through lower-level courts. One, in particular, stands out as a quite serious challenge for the ACA, in large part because it hinges on the initial Supreme Court determination that the individual mandate is a tax.
Section 1311 of the ACA states that a health insurance exchange must be "established by a State." Anyone who doesn't receive insurance from an employer must obtain insurance through an exchange or pay a penalty (i.e., a tax.) However, section 1401 of the ACA gives a tax credit for applicable taxpayers buying insurance through "an exchange established by the State under [section] 1311."
While section 1321 allows the federal government to create an exchange for states that choose not to do so on their own, the language of the ACA only allows tax credits to be given to people who buy insurance through an exchange established by their state. That's where the Supreme Court might have to step in yet again.
Article I, Section 8 of the U.S. Constitution requires that taxes "be uniform throughout the United States." If the ACA imposes a tax on citizens of all states but only provides a tax credit for those in states that setup their own exchanges, an argument could be made (and is being made) that the Uniformity Clause of the Constitution has been violated. Without the tax levies and credits, the individual mandate falls. Without the individual mandate, Obamacare implodes.
If it did happen
I'll leave the political consequences of any possible Obamacare implosion for pundits to discuss, but I am interested in what it could mean for investors. There are two sectors that would be greatly affected: medical device makers and hospitals.
Stocks in medical device makers would likely do well with a rollback of the excise tax imposed by the ACA. Several medical device companies announced layoffs last year in anticipation of this new tax. Hospitals, on the other hand, wouldn't fare so well if Obamacare's promise of fewer uninsured patients vaporizes.
I wouldn't bet on any of the scenarios under which Obamacare could fall necessarily playing out. However, there are some alternatives for investors who want to be in position to benefit just in case.
St. Jude Medical (STJ +0.00%) looks to be a good pick in the medical device sector. The company stands among the leaders in the cardiac device market with products from pacemakers to heart valves. St. Jude also appears to be positioned well to succeed in the rapidly growing renal denervation market. I think the stock should do well regardless of what happens, but shares would get a boost if the medical device tax fizzles away.
Playing the hospital market presents a much more difficult challenge. If Obamacare collapses, investors should avoid Health Management Associates (NYSE: HMA). The large hospital systems operator recently reported disappointing results from last quarter. It was also featured in an unflattering 60 Minutes story in December that contributed to the company's woes.
HMA would probably be one of the stocks most negatively affected by an implosion of Obamacare. However, if the status quo for the ACA holds, most hospital stocks, including HMA, should perform relatively well.
What if?
Perhaps posing "what if" scenarios seems like a waste of time. However, every investment decision involves asking many "what if" questions, even if only subconsciously.
What if Obamacare implodes? Whether you shudder at the prospect or relish the idea, incorporating possible changes that could impact business fundamentals into your investment planning makes sense.
