The Affordable Care Act, which you likely know best as Obamacare, has been a controversial law since day one.
The actionable component of the law, known as the individual mandate, lies at the heart of Obamacare's healthcare reforms. It requires individuals to purchase health insurance or face a penalty. It marks the first time in U.S. history that a mandate existed requiring consumers to buy health insurance. But, it simultaneously broke down barriers that previously allowed insurers to deny coverage to people with preexisting conditions.
Between the uncertainties of what Obamacare might mean for future premium pricing and knowledge deficits stemming from people still unacquainted with the law itself, Obamacare has had a pretty consistent history (at least according to Gallup) of being disliked.
Although most aren't satisfied with Obamacare in its current form, the majority would prefer it not be repealed. When you think about it, insurers and hospitals have been preparing for Obamacare for years, so scaling the program back could be disastrous for both the healthcare system and millions of insured Americans.
But, a lawsuit that's worked its way up to the Supreme Court could wind up scaling back a critical component to Obamacare's success.
Could this unravel Obamacare?
The case, officially known as King vs. Burwell, pits plaintiffs that allege the language of the ACA only allows individual states to hand out subsidies against the federal government. Currently, there are 37 states that have handed over the reins of their day-to-day healthcare exchange operations to the federal government via Healthcare.gov. Because of the way the healthcare reform law is written, it's not clear whether or not people who are purchasing health insurance through Healthcare.gov and receiving subsidies are receiving these subsidies legally.
The U.S. Supreme Court is on pace to review the case and make a ruling sometime in June. If the High Court finds in favor of the defense, you're likely to see no material change to Obamacare. However, if the Supreme Court rules in favor of the plaintiffs, then we could see a major test to the survival of Obamacare.
If the Supreme Court rules that subsidies granted via Healthcare.gov are illegal, it would mean all tax credits toward health insurance for Healthcare.gov users would immediately cease. On paper, we know this would be very bad for millions of people insured through Healthcare.gov, but prior to this month, we had no clue exactly what that would mean from an insured person and cost perspective. Thanks to a recent report from the Robert Wood Johnson Foundation, we now know much more about the pain an unfavorable ruling could inflict.
Here's how much an unfavorable ruling could cost America
According to the findings of the Robert Wood Johnson Foundation, or RWJF, a victory for the plaintiffs would result in 8.2 million people losing their subsidies and being unable to afford health insurance by 2016. Overall, the RWJF estimates that an unfavorable ruling would affect 9.3 million federal marketplace enrollees in the form of lost premium tax credits.
Specifically, the RWJF sees $28.8 billion in tax credits potentially being lost for 2016, as well as a 44% increase in the number of uninsured in the country. Even more telling, private nongroup insurance enrollment would be expected to fall by 69%, with just 3.4 million people left in the ACA's marketplaces. The losses would be greatest for those making less than 200% of the federal poverty level (approximately $23,000 per year), where a 91% reduction in enrollment is forecast.
Additional pain would be felt by regulators who would almost assuredly see very little in the way of penalty fee collection from this group since their insurance premiums would almost certainly cost more than 8% of their modified adjusted gross income, the level at which consumers become exempt from the individual mandate.
But, the effects of this ruling wouldn't just be felt by lower- and middle-income Americans. The RWJF projects that the roughly 4.9 million people purchasing health insurance without financial assistance in 2016 (mostly those making more than 400% of the federal poverty level) would see their premiums skyrocket by 35% to an average annual payment in federally covered states of $5,590.
An uncertain time
With the Supreme Court essentially holding the fate of Obamacare in its hands, I don't think there's any better word to describe the feeling among consumers, insurers, hospitals, and device makers going forward than "uncertain."
As ruling in favor of the plaintiffs has the potential to wreak havoc on many companies -- and there are a few that stand out as in the most danger.
Take Centene (NYSE:CNC), a company focused primarily on lower-income and government-sponsored individuals and families, and hospital operator Tenet Healthcare (NYSE:THC). Both companies operate primarily in states that are a part of the federal health exchange. Keep in mind that Centene only recently dipped its toes into the individual insurance market, but it and Tenet could nonetheless be clobbered in the short term if the ruling is unfavorable.
Tenet, for instance, is counting on more insured people walking through its hospital doors, meaning it can safely bill patients and their health-benefits providers and feel confident that it'll get paid. If the rate of uninsured people suddenly spikes, Tenet may have to set aside more money to cover the cost of treatment rendered to patients who can't pay. That's a direct deduction from Tenet's profitability.
It's also tough to say how a company like Anthem (NYSE:ANTM) would fare, considering its ties to state-run markets such as California, Washington, and New York, where it's seen substantial member growth. The addition of Amerigroup, an insurer focused on adding Medicaid and Medicare members, has also been a boon for Anthem. Still, premium pricing effects could ripple throughout the industry, and Anthem at 15 times forward earnings isn't the single-digit forward P/E bargain it was before Obamacare's online marketplaces launched in Oct. 2013.
I personally have a relatively high tolerance for risk with my investments, but placing money into the insurance, hospital, and device sector here is a risk that I'm simply not willing to take. If you have an extremely long view on your investment horizon, I'd opine that adding here may wind up being an OK idea, but you can't forget that the Supreme Court has the ability to dramatically alter the way Obamacare functions as a law. Until we have the Supreme Court's decision in hand, this is a situation I think best avoided from an investment perspective.
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.
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