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Could This Supreme Court Ruling Unravel Obamacare?

By Sean Williams – Nov 11, 2014 at 8:12AM

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Obamacare's future hangs in the balance of a Supreme Court ruling slated for June 2015. Find out what's potentially at stake for your healthcare plan as well as your investments.

Source: White House on Flickr.

Even though the Patient Protection and Affordable Care Act, which most Americans known better as Obamacare, was signed into law more than four years ago and has been fully implemented on the individual side of the health insurance market for about a year now, it remains arguably the most polarizing law of all time.

Obamacare's give and take
On one hand millions of Americans are now insured that under the prior system would not have had access to health insurance. Be it through an expanded subsidy program or the Medicaid expansion in just over half of all U.S. states, these individuals are now have the opportunity to get regular preventative care visits and potentially lead healthier lives.

Source: Flickr user Will O'Neill.

That's good news for these individuals, as well as the business world, which could see an increase in worker productivity. The health care system (especially hospitals) should also benefit as less service revenue is written off as uncollectable and presumably fewer patients suffer costly and debilitating problems as preventative care visits help people catch health concerns earlier in life.

Of course, there's another side to the coin, too. Obamacare simply isn't affordable for everyone, nor is it convenient for healthier individuals who would otherwise not take advantage of the healthcare system. While younger adults provide one of the important keys to profitability for Obamacare and insurers since they're generally healthier, they're also the most reluctant to join since they either feel invincible or simply can't afford the plans since they don't qualify for subsidies.

Additionally, not having all states expand their Medicaid program places millions of Americans in a "Medicaid gap" where they fall outside the coverage of Medicaid and below the level at which subsidies would kick in.

The next big challenge
Now, it would appear that on the precipice of Obamacare's second open enrollment, which kicks off this Saturday, Nov. 15, a new grey cloud is set to hover over Obamacare: a U.S. Supreme Court case.

Source: White House on Flickr.

According to a one-sentence statement issued late last week by the U.S. Supreme Court, it will take up a case that's been working its way through the U.S. legal system that looks at whether or not certain types of subsidies offered through Obamacare are legal. The language of the PPACA establishes subsidies are to be used for coverage purchased on an "exchange established by the state."

The legal question rests on the fact that 36 of the 50 states aren't running their own exchange, but are instead piggy-backing on Accenture's (ACN 2.18%) IT expertise and the federally run exchange known as You'll even note that the number of states on the federally run exchange grew by two this year as Oregon and Nevada are set to join after abandoning their unsuccessful attempt at a state-run exchange.

In short, if the Supreme Court were to rule in favor of the lawsuit and against Obamacare, it would be ruling against the millions of Americans that qualified for subsidies on the federal exchange. The Supreme Court anticipates issuing its decision by June 2015.

Source: Flickr user LaDawna Howard.

According to data from the Department of Health and Human Services 5.45 million people signed up through the federally run exchange in 2014. Of those 5.45 million people, 5.18 million, or 95% applied for financial assistance to help pay the cost of their health insurance. Furthermore, 87% of these enrollees indicated that they'd never been previously insured. If the Supreme Court upholds the lawsuit these 5.18 million people would no longer be eligible to receive a subsidy, which could easily price the majority of these Americans out of the market. 

Let's not forget, as well, that subsidies are one of the strongest lures for those aforementioned healthier young adults that insurers and Obamacare crave. If subsidies are removed from the 36 federally participating states it's quite possible that young adult enrollment could take a tumble.

In other words, you could say that this Supreme Court ruling could have make-or-break potential for Obamacare's future.

Huge investing implications
On top of having enormous implications for Obamacare's future, this Supreme Court ruling could have sweeping implications for insurers, hospitals, and even medical device and diagnostic manufacturers.

Whereas health-benefit providers like WellPoint (ELV 1.60%) and Centene (CNC 1.14%) have been among the biggest beneficiaries of Obamacare, they're also some of the most susceptible insurers to a rollback of federal subsidies were the plaintiff in the Supreme Court ruling to be victorious. WellPoint's incredible success in California and Centene's expansion into the individual market would be dramatically wiped out as lower-income consumers would likely struggle to make their monthly healthcare payments. Centene, specifically focuses on that lower-income consumers, while WellPoint has made acquisitions with the direct intent of gaining more government-sponsored and/or subsidy-assisted members.

Source: Flickr user Francisco Osorio.

The nation's largest hospital by market value, HCA Holdings (HCA 3.06%), along with the remainder of the sector, would feel the pinch as well. As we noted above, hospitals are currently relishing in lowered uninsured rates because it means potentially fewer write-offs for services rendered. This extra revenue can allow hospitals to expand their network, buy state of the art equipment, or perhaps even hire more employees to handle a growing influx of patients. Additionally, it could also result in hospital stocks initiating a dividend, which is an idea that HCA shareholders can now put on the back burner until after the Supreme Court issues its ruling.

Lastly, it's a big concern for medical device and diagnostic equipment makers. This industry requires a couple of things to fall into place in order to be successful, including good visibility for Obamacare, a free-spending hospital sector, and consumers to seek out medical care and/or preventative care visits with their doctor. If millions of Americans suddenly lose their subsidy it could send a ripple throughout the sector that reduces hospital and outpatient clinical visits, dramatically cuts hospital spending, and clouds Obamacare's future.

Regardless of whether you support or oppose Obamacare, this ruling, just like the individual mandate ruling the Supreme Court issued in 2012, needs to be followed very closely as the path our health care system takes will completely depend on the outcome.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends Accenture and WellPoint. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

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Stocks Mentioned

Elevance Health Inc. Stock Quote
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