Will This Be Obamacare's Undoing?

While consumers patiently await the Supreme Court decision on King v. Burwell, they hold the hope that their Obamacare federal subsidies won't be eliminated, making health insurance unaffordable.

Subsidies are the backbone of the Affordable Care Act, allowing 11 million Americans the chance at health coverage that used to be nothing but a fantasy for most. As consumers hold their breath for the final gavel, 55% of Americans are hoping the dust settles and the ACA stays as is. If not, the aftermath would ripple through the entire healthcare sector and beyond.

A full transcript follows the video.

Kristine Harjes: The biggest threat to Obamacare. This is Industry Focus.

[INTRO]

Hello, and welcome to Industry Focus healthcare edition. This is Kristine Harjes from the financials edition of Industry Focus, filling in for Michael Douglass as your host today. Don't worry, all familiarity is not lost, as I've got Foolish healthcare analyst Todd Campbell here on the line with me. Hey, Todd!

Todd Campbell: Hi, Kristine! For a second there I thought that I was going to be talking about bank stocks today.

Harjes: Yeah. No worries. We'll stick within the healthcare realm.

Campbell: Excellent.

Harjes: Don't let me do anything else. Our focus today -- keeping it in healthcare -- is something you've been seeing in the news lately, quite a bit. Namely, the Supreme Court case King v. Burwell which has to do with the Obamacare subsidies. I figure we'll kick off talking a little bit about "What is Obamacare? How's it doing so far? How many people are involved? What is this whole 'subsidy' issue?" Todd, do you want to lead off talking about the purpose of Obamacare?

Campbell: Sure. Most people are probably a little bit familiar with Obamacare at this point. Essentially what we're talking about a law that was signed in -- the Affordable Care Act -- in a bid to reduce the number of people who were uninsured, with the thinking being; if you can get people continuous care throughout their lifetime, they're less likely to develop really expensive, chronic care conditions -- like heart disease -- or to end up in emergency rooms for things that could have easily been treated at a doctor's office.

So far, we're two years into -- we just finished up our second enrollment period. More people signed up this time than they did the last time, and the uninsured rate continues to drop. On that measure, the Affordable Care Act is doing what it was set out to do. A big question remains, though, on "What will Obamacare look like in the years to come?"

Harjes: Following up on that uninsured rate; it's at its lowest since 2008 when Gallup first started tracking it. Which is actually really impressive, and stands to show that Obamacare is kind of doing something right so far. Regardless of whether you stand on the issue of if this law is a good thing or not, if its purpose is to get more people health insurance; it is doing that. The aftermath of more people having access to the health care is that it should bring costs down. So far, we're starting to see that as well. It makes sense.

If you have a greater portion of the U.S. population signed up for medical insurance then you have more people spreading the cost base around. Especially as you enroll younger, healthier people who aren't going to be as expensive to the insurance companies as more elderly, or sicker people. By that measure, the uninsured rate being low goes to say that the law might actually be doing a very good job of keeping cost inflation modest. As you mentioned, we have yet to see where it's going to go after this, especially in the case that we have already brought up, King v. Burwell. What's going on with that?

Campbell: King v. Burwell continues a trend that is aimed at looking at this law and dismantling it. Essentially the goal of King v. Burwell is to go out and be able to say "Does the federal government have the right to mandate that Americans go out and get insurance coverage?" What they discovered in looking through the language of the bill was that there is a part of the bill which talks about subsidies, and offering subsidies, and paying subsidies to American consumers who sign up on the health care.gov exchange.

This calls into question whether or not the government does have a right to give subsidies out to states that didn't' start their own health care insurance exchange. Essentially you've got a situation where we passed the ACA, the ACA said "Everyone has to get health insurance." But some states didn't want to setup their own health insurance exchange for the people who live in that state to sign up with.

So, health care.gov was created in order to allow people who live in those states to go onto the marketplace, pick a plan, and receive the subsidized payments that reduced their cost. The question again is: "Does the government have the right to mandate that you have coverage?" The way that they're attacking that is simply by saying "Can the government offer subsidies to people who are enrolling in health care.gov, in states that didn't setup their own exchange?"

Harjes: Exactly. Just for some context on how many states we're talking about here; those are 34 states.

Campbell: It was 36 originally. They dropped to 34 because two other states went off and did their own thing. We're talking a lot of states, and a lot of people. Of the 11.7 million people who signed up for health insurance in the second enrollment period, 8.8 million people did so through healthcare.gov. We're talking about a very substantial number of people. It makes sense. In theory, people are uninsured because they can't afford coverage. So they go to the marketplace, and because they're low income they get offered a subsidy.

That subsidy makes that insurance more affordable, therefore they can then get insurance. The big question is, at the end of this month when the supreme court finally weighs in with its decision on this case; will they say "Yes, subsidies are OK", or "No, subsidies are not OK"? If they say 'subsidies are OK', then it's business as usual. If they say 'subsidies aren't OK' then -- wow. That throws a big curveball at Obamacare.

Harjes: It sure does. What I find really interesting about this case is, it speaks to our legal system as a whole, in that you can't just go challenge a law and say "I don't like this law." You have to actually have some sort of material interest in it. What this actual case is, is for people in Virginia who said, technically, by the language of the law, they have standing to argue against it. Without these subsidies that were given to them federally, they would have been exempt from the individual mandate requiring them to get health insurance; because the cost of the cheapest insurance plan would have exceeded 8% of their income.

However, with the subsidies, the subsidized cost was low enough that the plaintiffs were required to purchase insurance. So they have this material interest in the case, and that's what they're basing this entire thing off of. Which, even though it's just challenging that one aspect of Obamacare, it really stands to derail the entire program.

Campbell: Yeah. What's really interesting too, is that it's not even this case -- this case wasn't even the reason that this case got to the Supreme Court. In the district court, and the appeals court the plaintiffs lost. It was actually Halbig versus Burwell which went before the D.C. district court that won, and because it won and King versus Burwell didn't win, the Supreme Court has to step in now and hear the case, and make a decision.

Harjes: Of course, that's one of the Supreme Court's favorite things to do; reconcile these circuit splits and offer a decision that will then be binding nationwide.

Campbell: Right. If they come through at the end of the month and say "You have to follow the language of the law as it's written, and has to be a state setup exchange", who knows how Obamacare is going to look? No one wants to have millions of people lose their insurance coverage, but that's most likely going to happen unless something is done to bridge the gap.

Again, you're talking about people who are paying less than $100 a month for their insurance, now having to pay $350 or more, per month in insurance. And these are low-income, middle-income individuals. They're most likely not going to be able to pay that bill when it jumps.

Harjes: Exactly. You can see that the public agrees there by a margin of 55% to 30%. In a new poll by Washington Post and ABC News, more people have said that the court shouldn't take this action to stop the federal subsidies.

Campbell: What's interesting about that is, no matter where you fall -- it doesn't matter if you're conservative, liberal, no matter what -- more people believe that the subsidies shouldn't be ended, than do believe that Obamacare should continue as it is. I think no one really wants to take food out of their neighbor's pantry, if you will. It's a very interesting dynamic, because it puts a tremendous amount of pressure on Washington to figure out what to do if the Supreme Court does say "No subsidies."

Harjes: Let's talk about what exactly would happen if that were the decision. Where would the ripples lead? What would be the aftermath?

Campbell: What's interesting is -- I guess it depends on what you want your outcome to be. Congress could simply strike that language, or rewrite that language and things would just go on as normal. However, that's unlikely because congress is now under the control of the conservatives who would prefer to have it repealed. Who knows how that's going to play out? It could be that the conservatives say "Let's push this back beyond 2016, pass legislation that acts as a bridge until 2017, and that way we'll let the voters decide who they want at the polls as president, and we'll deal with the issue then. We'll just kick it down the road."

That could happen. You could have individual states who go in and setup their own state exchanges. If they do that then I suppose investors -- we are The Motley Fool, we're talking about investing takeaways here, too -- might want to consider a name like Accenture (ACN -0.23%), which designs and runs the contract for healthcare.gov. Conceivably, it could be hired by various states to setup their own state exchanges. I guess, ultimately, if subsidies are struck down; the real losers here would be health insurers -- because they would lose billions of dollars in premium revenue -- and hospitals, who would now be faced with having to write off more care given that more people would be showing up into their ERs without having health insurance.

Harjes: Yeah, and hospitals had been pretty big winners so far, too. With having rising enrollment helping them to reduce the amount of care that they need to write off...

Campbell: That's almost hundreds of millions of dollars a year. Without a doubt.

Harjes: Yeah. Most of the people that stand to lose subsidies are the same people who can't pay for ER visits, or chronic care. So a drop in membership could certainly cause hospital stocks to take a hit.

Campbell: Absolutely. Again, the people who would lose these subsidies are the people who are least able to pay for health care services, which is why this whole law was passed in the first place; to try and get them into the system, be able to identify illness early, and reduce the long term costs associated.

Harjes: Clearly there are going to be ripple effects going out into a bunch of different subsectors of the health care industry. I would even throw out there some diagnostic developers. People like OraSure (OSUR 0.67%) who make a point of care test for diagnosing hepatitis C. If people lose their subsidies, lose their insurance; they don't end up getting this test and that's not good for this company. That's also really not good for the insurers, too. If you don't know that you have hepatitis C the liver damage is only going to get worse.

I'd also throw out somebody like Intuitive Surgical (ISRG 1.22%) who sell their products to hospitals. If hospitals aren't as profitable they're not going to have that spare money to buy these very expensive products. There could really be some far reaching repercussions.

Campbell: Absolutely. This will cut across all sectors. Theoretically, drug demand will fall, medical equipment demand will fall, all sectors and subindustries associated with health care will definitely feel the impact. This is something that investors need to be paying very close attention to as we get further into the month.

Harjes: Absolutely. A decision is expected either later this month, or maybe early July. It's absolutely something to keep an eye on as a health care investor, and an investor in general. You don't even know how far these effects could ripple to.

Folks, be sure to check back with Fool.com for more coverage on King v. Burwell, other healthcare industry news, and for all your other investing curiosities. Todd, thanks so much for your insights today. I'm glad I got to do this show with you!

For The Motley Fool I'm Kristine Harjes. Thanks for listening, everyone. Fool on!

As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear.