An upcoming U.S. Supreme Court ruling that could eliminate subsidies for certain Americans who bought private health insurance coverage under the Affordable Care Act, commonly known as Obamacare, could deprive insurers of up to 10 million customers and roll back the gains these companies' stocks have enjoyed, according to two reports issued this week.
Though the reports don't specifically discuss health care stocks, they indicate a potential loss of customers from all health plans with products on the exchanges, and that means a potential loss of business for these publicly traded firms -- something investors should definitely keep in mind.
A new analysis from the RAND Corp. said eliminating government subsidies for "low- and moderate-income people" from 34 states who bought coverage through the federal exchange would "reduce enrollment in the individual market by more than 9.6 million." A separate issue brief from the Urban Institute determined an additional 8.2 million people could be uninsured in 2016 if the high court rules against federal subsidies and tax credits in this case.
Such scenarios are possible should the Supreme Court rule this spring that the Affordable Care Act does not allow subsidies to help Americans pay for health insurance in those states that did not set up their own online marketplaces.
The case to be heard by the court is King v. Burwell. It essentially comes down to whether subsidies are illegal because wording in the Affordable Care Act specifically rules out subsidies in states that don't establish their own exchanges. A few words in the law say an exchange should be established by the state, though the legislation's supporters and the insurance industry note that the law also has provisions for the federal government to run the exchange if the states don't.
The high court surprised some observers by even agreeing to hear the case, which is likely to occur as early as next month, with a ruling expected before the end of June.
"The disruption would cause significant instability and threaten the viability of the individual health insurance market in the states involved," RAND senior economist Christine Eibner, who co-authored the organization's report, said in a prepared statement.
Such disruption would roil the individual insurance businesses of companies such as Aetna, Cigna, Humana, and UnitedHealth Group. Particularly affected could be Blue Cross and Blue Shield plans such as those operated by Anthem. Blue Cross plans have long dominated the individual health insurance market across the country, and they have placed a big bet on business tied to the health law.
If the court strikes down the subsidies, insurance enrollment under the ACA in the individual market would fall to 4.1 million from 13.7 million, RAND said. It's unclear how that would impact insurance companies annually.
RAND pointed out that losing subsidies would result in individuals' premiums jumping, which could cause some affected customers to eventually stop making payments to insurers. The difference in price is not small; premium costs for a 40 year-old smoker would jump to $5,060 from $3,450 in a silver-level insurance plan under a scenario outlined by RAND.
The Urban Institute, said "nongroup coverage" in states with federally facilitated marketplaces would jump 35%, or $1,460 per person.
"The Supreme Court's decision will have far-reaching effects on the number of uninsured Americans and premiums," Andrew Hyman, senior program officer at the Robert Wood Johnson Foundation, a funder of the Urban Institute and the study, said in a statement accompanying the Urban Institute issue brief. "The Court's decision could significantly undermine the stability of insurance markets in dozens of states, which will impact those who are covered as well as the remaining uninsured."
While many insurers have told Wall Street analysts on recent earnings calls that the individual business from the health law was breakeven through the first year of coverage, a potential exodus of customers who no longer have financial help to pay their premiums could turn a wash into major losses. That would not be good for stocks that have been on a roll largely from new business from the health law.
Bruce Japsen has no position in any stocks mentioned. The Motley Fool recommends Anthem and UnitedHealth Group. 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.