Obamacare lives again thanks to the United States Supreme Court.
Obamacare -- or the Patient Protection and Affordable Care Act, as it's officially known -- was signed into law by President Obama in March 2010. It was designed to completely turn the healthcare system on its head by altering the way in which consumers shop for health insurance, changing the way insurers choose their members, and even modifying how primary care physicians treat patients.
But as you might have imagined, such change brought pushback from opponents. In fact, Obamacare has faced not one or two but three major challenges since it was signed into law. As we learned earlier this week, in all three instances the Supreme Court has directly, or indirectly, saved Obamacare from a potential disaster.
The Supreme Court saves Obamacare for a third time
In the summer of 2012 the Supreme Court, or SCOTUS (Supreme Court of the United States), ruled that the individual mandate fell within the power of Congress to "lay and collect taxes" by a vote of five to four. As a reminder, the individual mandate is the actionable component of the PPACA requiring individuals to purchase health insurance or face penalties when filing their taxes. The penalty in 2015 is the greater of $325 or 2% of an individual's modified adjusted gross income. Next year it'll jump to the greater of $695 or 2.5% of modified AGI.
More recently, in late March the Supreme Court indirectly saved Obamacare by refusing to hear a case known as Coons vs. Lew. The plaintiffs' argument in this case was that the Independent Payment Advisory Board panel that has yet to be created would hurt businesses by setting Medicare reimbursements at levels that wouldn't cover medical practitioners' costs. In Aug. 2014, the U.S. Circuit Court of Appeals in San Francisco dismissed the case, and in late March SCOTUS upheld that dismissal by refusing to hear the case.
Then, earlier this week, Obamacare dodged perhaps its biggest challenge yet when SCOTUS sided with the defense in King vs. Burwell by a vote of six to three.
The case was built around the language used to develop the laws of the PPACA. Specifically, it focused on the language that suggested only states may hand out subsidies, officially known as Advanced Premium Tax Credits. The problem emerged when close to three dozen states used the federally run health exchange, Healthcare.gov, to divvy out subsidies. Since the federal government is not a "state," the plaintiffs alleged that the subsidies advanced to some 6.4 million enrollees were illegal.
As Chief Justice John Roberts wrote in the 47-page decision released by SCOTUS,
"Congress passed the Affordable Care Act to improve health insurance markets, not to destroy them. If at all possible, we must interpret the act in a way that is consistent with the former, and avoids the latter."
Of course, not everyone agreed with Roberts' assessment. Justice Antonin Scalia, one of the three dissenting Justices, opined that, "the Supreme Court of the United States favors some laws over others, and is prepared to do whatever it takes to uphold and assist its favorites." Scalia also jeered, "We should start calling the law SCOTUScare."
What this ruling means
Without getting too technical, the ruling this week from SCOTUS means that Obamacare will continue on without much, if any, change.
Had the plaintiffs' argument been upheld, it would have cut off subsidy payments for more than 6 million low-income individuals and their families. In 2014 the average cost for monthly health insurance was $82 for subsidy recipients, with the subsidy itself lopping off an average of $264 per month. Chances are good that if SCOTUS had ruled in favor of the plaintiffs, very few of those 6.4 million people would have been able to meet their ongoing premium payments. I suspect this would have resulted in a massive rise in the rate of uninsured individuals and a substantial upward correction in premium plan prices for those remaining on the Obamacare exchanges.
However, the "what ifs" are clearly in the rearview mirror now, and both insurers and hospitals can breathe a monumental sigh of relief.
Insurers are an obvious beneficiary because the ruling means consumers can continue to afford their plans in states that have chosen to utilize Healthcare.gov's platform. For example, UnitedHealth Group (NYSE:UNH), which chose to expand to 20 new states in 2015, and Centene (NYSE:CNC), which is somewhat reliant on Healthcare.gov-listed states for new members, are seeing an boost in their respective stock prices following the ruling.
But hospitals were an even bigger winner here. Millions of Obamacare enrollees getting to keep their subsidies means hospitals don't have to worry as much about having to treat uninsured patients and footing the bill for their care. We've already begun to witness the positive effects of Obamacare on hospitals' bottom-lines, with HCA Holdings' (NYSE:HCA) provision for doubtful accounts falling to just 6.3% of revenue in the first quarter from 8.8% in Q1 2014. Tenet Healthcare (NYSE:THC) also received a substantial boost since its hospitals are located primarily in Healthcare.gov network states. It, too, has seen its provision for doubtful accounts dropping on a year-over-year basis as a percentage of net operating revenue.
Big challenges still remain
Yet just because Obamacare has cleared its third hurdle with SCOTUS doesn't mean that the law is free from additional challenges. There is still a laundry list of challenges to address that could, in effect, cripple the effectiveness of Obamacare.
One big problem that hasn't been tackled is Obamacare's ability to control medical cost inflation.
Obamacare's transparent exchanges and simplified access to primary care physicians were designed to allow consumers to make smarter purchasing decisions and to stay on top of their well-being. However, the rising cost of personalized medicine and targeted therapies threatens Obamacare's cost controls. And while insurers do have to justify 10% or higher premium plan increases to regulators, there's little stopping insurers from actually implementing a rate hike.
The Medicaid Gap is another major problem that could stall Obamacare's success.
Under the PPACA, the federal government made billions of dollars available for states to expand their Medicaid programs. Typically, Medicaid covers the full medical expenses of people who earn 100% of the federal poverty level or less each year. Under the Medicaid expansion, people making over 100% of FPL, but under 138% FPL, would be covered. Currently, there are 21 states that have chosen not to expand their Medicaid program, citing potential increased long-term costs. These 21 states have left millions of consumers stuck in the so-called "Medicaid Gap," whereby they don't qualify for Medicaid and are too poor to afford insurance on the exchanges.
The jury is also out on the individual mandate penalty.
The penalty is in place to coerce consumers to enroll for health insurance. The more insurers can spread their costs over a greater swath of the population, the more controlled premium plan cost inflation should be. In order for this to happen, insurers need healthier young adults to enroll -- which is where the penalties come in for non-compliance.
At the moment, the penalty for non-enrollment is far lower than the cost of actually buying health insurance for the entire year, which may not be enough to coerce healthier adults to enroll. Furthermore, the IRS has little authority to go after taxpayers who don't buy health insurance and owe the penalty. The IRS can't garnish wages or seize property for individual mandate violators; all it can do is withhold the money from your tax refund, should you be owed one, or ask you nicely to pay.
And finally, there are four additional legal challenges that could still come to the forefront. For example, the House of Representatives vs. Burwell is challenging the administration's current $175 billion in payouts to insurance companies over the next decade, which help offset their losses for treating low-income individuals. Per the House's argument, the money for this program was never properly appropriated.
In other words, the SCOTUS' ruling is far from a fairy tale ending for Obamacare. As the law evolves we should have a better idea of how some of these concerns will play out. However, in the meantime, expect more wild fluctuations in opinion surrounding this highly controversial law.