The country is awaiting a major event later this week with the
Supreme Court scheduled to deliver a decision on the Patient
Protection and Affordable Care Act (ACA), popularly referred to as
"Obamacare." This ruling will mark an end to the uncertainty
surrounding Obamacare's future.
The Story So Far….
The Patient Protection and Affordable Care Act, passed through
Congress in 2010, represents major changes in the nation's
The Act is expected to provide coverage to 32 million uninsured
Americans, make healthcare facilities more affordable, expand
coverage for customers with pre-existing health conditions and keep
a check on health insurers. The healthcare reform aims to end the
discrimination policy of insurance companies, create competition
amongst insurers through the establishment of health insurance
exchanges, add value to the overall healthcare system and reduce
However, the legislation has many detractors who have contested
several of its stated benefits and consider it another entitlement
program that the country can ill afford.
Different parts of the legislation have been challenged in
federal courts, with detractors attempting to challenge the scope
of the law or even declare some parts -- or all of it --
The Supreme Court heard arguments on certain aspects of these
cases in March 2012, including the constitutionality of the
individual mandate and expansion of Medicaid in 26 states. Both
these provisions are scheduled to be implemented in 2014.
The individual mandate has drawn the most amount of attention.
This mandate requires all uninsured Americans to purchase a minimum
level of health insurance coverage; if they don't they will be
fined. The mandate is being viewed as unconstitutional and the
Supreme Court is expected to rule on this and other aspects of the
Act this Thursday.
Why is the Ruling So Important?
As mentioned above, the Patient Protection and Affordable Care
Act has the potential to change U.S. healthcare as we know it. The
healthcare sector is highly exposed to the decision, with several
companies having a huge stake in the issue.
While it is difficult to predict the Court's ruling, the most
likely scenarios could involve the Court revoking or upholding the
legislation in its entirety. Another scenario could see the Court
omitting the individual mandate and other provisions.
Each of these outcomes will affect healthcare companies in
varying degrees. The stakes are high with several companies likely
to lose billions of dollars depending on the ruling.
In the event of the individual mandate being declared
unconstitutional or repealed without corresponding changes to other
provisions of the legislation, insurance players will face the risk
of adverse selection. Provisions that require revision include the
guaranteed issue and renewal requirements, prohibition on
pre-existing condition exclusions and rating restrictions. If,
however, the provisions are left unchanged, insurers will see an
increase in medical claims.
If the entire law is passed without any amendments and
subsequently implemented, then insurers will have to shell out huge
sums to align their businesses with the changed landscape.
The sector will not be spared even if most of the provisions of
the reform are held back. The health insurance sector will continue
to be under tight observation and scrutiny. Some new rules will
come into effect to rein the steep rise in healthcare costs adopted
by many of the insurance companies over the past several years.
A Boon for Healthcare Stocks?
Companies that should benefit significantly if the Act is shot
down entirely include medical device as well as insurance
companies. Under the ACA, medical device companies are required to
pay an excise tax of 2.3% from 2013. The scrapping of the Act will
provide relief to companies like
St. Jude's Medical
Meanwhile, companies like
), which provide managed care plans to large and small employers,
individuals, Medicaid and senior markets, stand to benefit if the
Court deems Obamacare unconstitutional. In such a scenario, these
companies would not be forced to provide coverage to people with
pre-existing conditions and would be in a position to charge higher
Insurance companies like
) should benefit if the Act is repealed. Although some provisions
of the healthcare reform legislation such as the establishment of
minimum medical loss ratios (MLR) are already effective, further
changes including the annual fees on health insurance companies,
the excise tax on high premium insurance policies and the
guaranteed coverage requirements, will come into effect after
Therefore, revoking the Act would be beneficial to these
companies. However, it's important to note that these companies
would be losing out on the prospect of covering an additional 32
We note that insurance companies like UnitedHealthcare, a
) company, will continue to offer important healthcare insurance
protections that were included in the 2010 healthcare reform law,
no matter how the US Supreme Court rules.
UnitedHealthcare said that it will continue provisions related
to coverage of preventive healthcare services, coverage of
dependents up to age 26, lifetime policy limits, rescissions and
Sectors rooting for the upholding of the Act include hospitals
and health maintenance organizations (HMOs) like
), as well as pharma companies. While Obamacare would provide HMOs
with significant opportunities for membership growth in existing as
well as new markets, pharma companies would also see an increase in
revenues with 32 million uninsured people gaining coverage.
The individual mandate of the Act provides hospitals like
Universal Health Services, Inc.
HCA Holdings, Inc.
) with the chance to reduce losses resulting from the treatment of
Finally, there are some companies that should benefit
irrespective of the Act being repealed or upheld. These are
electronic health records companies like
Allscripts Healthcare Solutions, Inc.
). Obamacare requires practitioners who have been maintaining paper
records to switch to electronic medical records. With several
businesses transitioning to electronic records, electronic health
records companies should continue to witness demand irrespective of
the Supreme Court's ruling.
The bottom line is that the much-awaited Supreme Court ruling
will remove an overhang which has been affecting healthcare stocks
ever since the Act was passed.
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