Source: White House on Flickr.
Regardless of whether you're a proponent or opponent of the Affordable Care Act, better known as Obamacare, no one can deny that it's changed the healthcare landscape.
For some lower-income citizens, it has provided their first regular access ever to preventative medical care. For others, the threat of being penalized via the individual mandate has coerced them into purchasing health insurance that they otherwise would not have bought. As usual, when it comes to Obamacare, everything comes down to perspective.
Eliminate this and Obamacare could be in big trouble
Last week, we received quite the helping of perspective from the RAND Corporation, which released an abstract study (link opens PDF) on the Affordable Care Act, which primary looked at the effect subsidies and young adult enrollment have on premium pricing. The reason this study was undertaken has to do with three current lawsuits over the language of the ACA, which argue that premium subsidies are only legal on state-run exchanges (of which there are currently 14) and not the federally-run exchange, Healthcare.gov.
The specific conclusions of RAND's study were breathtaking, with the research body coming to the conclusion that if premium subsidies -- the amount paid to qualifying low-income individuals who otherwise couldn't afford health insurance -- were removed, Obamacare's viability would be in serious jeopardy.
Source: Flickr user Steven Depolo.
According to RAND's estimates, if premium subsidies were removed, which is a possibility considering these lawsuits are working their way up through the U.S. court system, health insurance premiums would climb by a whopping 43.3%, Obamacare's health exchange enrollment would plummet by 68%, and more than 11 million people would wind up uninsured. In other words, there is a marked dependency on these subsidies in order to encourage low-income people to sign up, and according to the RAND Corporation, "If the ACA's subsidies are eliminated entirely, our model predicts a near death spiral -- that is, sharp premium increase, and drastic enrollment declines in the individual market."
More concerns loom
However, that wasn't all. RAND also hypothesizes a connection between subsidies and young adults. RAND concludes that the majority of young adults who are tax-eligible and qualify for a subsidy would remain in the system since they are incentivized to do so. However, once that subsidy is removed, a vast majority of young adults would discontinue purchasing health insurance.
Source: White House on Flickr.
RAND further estimates that each one percentage point increase or decrease in young adult enrollment as a share of total enrollees positive or negatively affects premium prices by 0.44%.
The final important finding from RAND was that the individual mandate -- the actionable component of the ACA that penalizes individuals if they don't purchase health insurance -- is practically a necessity if universal coverage is to be achieved. Though eliminating the individual mandate would produce a mere 7% increase in total premiums, it would also result in a 20% decline in overall enrollment, or more than 8 million people.
A path has been laid
In short, the HHS and Obama Administration need to ensure that premium subsidies (and to a lesser extent, the individual mandate) remain in place if Obamacare is to be successful.
Why? Because a whopping 87% of enrollees in the federally run Healthcare.gov received some form of financial subsidy in 2014. This assistance, per the HHS, reduced the cost of health insurance for these enrollees by about 75%. If these subsidies were suddenly pulled, Healthcare.gov could lose the majority of its 2014 enrollees.
This is particularly meaningful for many health insurance companies that angled their ability to sign up new enrollees around the idea of premium subsidies.
Source: Covered California.
WellPoint (WLP 1.75%), for example, was perhaps the nation's most successful insurance company in terms of enrolling new members in 2014. It was partly successful because it purchased Amerigroup in 2012, a health-benefits provider that focused on government-sponsored (i.e., Medicaid) enrollees. WellPoint would certainly find some solace as it operates in a number of states that run their own exchange and could, based on the lawsuits' allegations of interpreting ACA law, continue to divvy out subsidies, such as California. However, in other states that are part of Healthcare.gov, such as Georgia, Ohio, and Wisconsin, WellPoint could see steep member losses if subsidies were pulled.
It also particularly hits home with insurers that focus on lower-income individuals, such as Molina Healthcare (MOH +0.64%) and Centene (CNC 0.91%). To be clear, these insurers get the bulk of their revenue from Medicaid enrollees, but the removal of subsidies would certainly sting since subsidized individuals is where they've focused their attention on enrolling new members. Like WellPoint, Molina Healthcare and Centene get a bit of a reprieve by operating in the lucrative California market, but they could face a member exodus in Texas, Ohio, and Florida if federal subsidies are removed.
Something you have to keep in mind
Based on the current timeline, should these lawsuits continue to work their way through the U.S. court system, these legal challenges could wind up in front of the Supreme Court as early as next year. Thus far, the Supreme Court has upheld the individual mandate portion of the ACA, but there's no telling at this time whether or not federal subsidies will also be supported.
As an investor, you need to keep a watchful eye on this situation as it develops since it could have a meaningful impact on health insurers, and a trickle-down effect to other aspects of the healthcare system, such as hospitals, medical equipment makers, and pharmaceutical companies. It also could have a drastic effect on what you'll pay for healthcare in the upcoming years. Consider yourself warned!
