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 healthcare sector.
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 premiums.
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 -- unconstitutional.
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 Medtronic Inc. ( MDT ), Intuitive Surgical ( ISRG ), St. Jude's Medical ( STJ ) and Edwards LifeSciences ( EW ).
Meanwhile, companies like WellPoint, Inc. ( WLP ), 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 premiums.
Insurance companies like Aetna Inc. ( AET ) and Cigna Corp. ( CI ) 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 2014.
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 million people.
We note that insurance companies like UnitedHealthcare, a UnitedHealth Group ( UNH ) 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 appeals.
Sectors rooting for the upholding of the Act include hospitals and health maintenance organizations (HMOs) like Molina Healthcare ( MOH ) and Amerigroup Corporation ( AGP ), 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. ( UHS ), Tenet Healthcare ( THC ) and HCA Holdings, Inc. ( HCA ) with the chance to reduce losses resulting from the treatment of uninsured patients.
Finally, there are some companies that should benefit irrespective of the Act being repealed or upheld. These are electronic health records companies like athenahealth, Inc. ( ATHN ), Cerner Corporation ( CERN ) and Allscripts Healthcare Solutions, Inc. ( MDRX ). 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.