The Patient Protection and Affordable Care Act, otherwise known as Obamacare, is no stranger to lawsuits that claim it's unconstitutional. Indeed, this challenge made it all the way to the Supreme Court. But in 2012, Supreme Court Chief Justice John G. Roberts ruled that because the penalty for noncompliance with the individual mandate is a federal tax, Obamacare is constitutional.
For many, that ruling firmly settled the controversy regarding the overall constitutionality of Obamacare. However, in a somewhat surprising twist, it also opened the door to a new challenge. Specifically, Sissel v. United States Department of Health and Human Services asserts that the individual mandate is unconstitutional because it violates the "Origination Clause." More importantly, this lawsuit is making its way to the Supreme Court. While it seems unlikely that the Supreme Court will rule in favor of the plaintiff, if it did, it could directly affect hospital stocks. So let's look at what investors should watch out for.
In 2009, the House unanimously passed H.R. 3590, the "Service Members Home Ownership Tax Act of 2009." The purpose of this bill was "[t]o amend the Internal Revenue Code of 1986 to modify the first-time homebuyers credit in the case of members of the Armed Forces and certain other Federal employees." In other words, it was a housing tax break for service members. However, upon reaching the Senate, Harry Reid (D-Nev.) removed all but the first sentence of the original bill and renamed it the "Patient Protection and Affordable Care Act," which then passed in the Senate, and continued on through the legislative process.
Thus, while H.R. 3590 originated in the House, the Pacific Legal Foundation -- the foundation pursuing the lawsuit -- argues that because of how it was remade in the Senate, it violates the intent of the Article 1, Section 7 of the U.S. Constitution -- a.k.a. the Origination Clause -- which states, "All bills for raising revenue shall originate in the House of Representatives."
How this could affect hospitals
It's important to note that what the Senate did isn't out of the ordinary. Indeed, the Troubled Asset Relief Program, or TARP, act of 2008 was passed in the same way. However, that hasn't stopped this lawsuit from gaining momentum. Consequently, Obamacare may once again face the Supreme Court. And if the Supreme Court rules that the individual mandate violates the Origination Clause, that could completely undermine the law, as the individual mandate is a central component. That, in turn, would have a direct impact on health-care stocks, and hospital stocks in particular.
When Obamacare was ruled constitutional, shares of hospital stocks such as Community Health Systems (NYSE:CYH), Tenet Healthcare (NYSE:THC), and Lifepoint Hospitals (NASDAQ:LPNT) saw a favorable boost. And the reason is straightforward: Hospitals are required to provide care even if a patient doesn't have insurance. This requirement leads to a number of unpaid bills, which negatively affects hospitals' earnings. But because the individual mandate imposes a "tax" on anyone without insurance, the amount of people who are uninsured is expected to decline. Under Obmamacare, Forbes estimates that hospitals will reduce 30% of their unpaid bills.
That's great news for hospitals' earnings. However, if the Supreme Court rules that the individual mandate is unconstitutional because of how it was passed, hospital stocks that saw a gain -- because of the expected drop in unpaid bills -- could decline.
What to watch
There's no way to know for sure what will happen with Sissel v. United States Department of Health and Human Services. However, if the Court rules in favor of the plaintiff, hospital stocks could see a decline. Consequently, this is something investors should continue to monitor.
Fool contributor Katie Spence has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.