Will Trump's Executive Order Rattle Healthcare Market?

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Donald Trump has signed an executive order in relation to the Affordable Care Act (ACA) or the more popularly called Obamacare. The move signals the urgency to reshape the ACA. Trump's executive order gives broad power to the federal agencies to undo stringent regulations enveloping the ACA. This includes the individual mandate which required every Americans to get a health insurance policy or to face a penalty.

This urgency to replace the law was evident in Trump's comment in the final week of his campaign. He had declared, "We will do it, and we will do it very, very quickly. It is a catastrophe."

Trump was a staunch opponent of the ACA and this action proves it. Though the order doesn't specify what needs to be done, the fact that the President moved an order in his very early days of taking the office signals his hatred for Obama's signature achievement.

Though the order did not specify what required to be done, Larry Levitt, senior vice president at the Kaiser Family Foundation stated that "Potentially the biggest effect of this order could be widespread waivers from the individual mandate, which would likely create chaos in the individual insurance market."

The individual insurance market works via public exchanges set up in 2013. These provide subsidized coverage to attract people to get insurance cover. Though the exchanges pulled a million of uninsured people and led to an increase in enrollment for health insurers, they lost their appeal since the business conducted on these exchanges turned out unprofitable for most of the top players.

What led to losses was that the population buying coverage mainly consisted of the old and the sick carrying high frequency of claims for insurers. While the cost of insuring these individuals were to be compensated by the younger generation who would buy coverage (since the younger population is healthier and has low incidence of claims), they largely stayed away from the exchanges. This led to steep losses for some of the big players such as UnitedHealth Group Inc. (UNH) and Aetna Inc. (AET).

These plans have already narrowed down their presence on the exchanges but trouble looms large for those who still are carrying on the business like Molina HealthCare, Inc. MOH and Centene Corp. CNC . This is because a repeal of subsidy will make insurance all the more costly and keep away customers from buying insurance, thus leading to a decline in membership.

The order also stated that one of the goals will be to provide greater flexibility to states. It is being inferred that this would mean granting block aid to states for Medicaid in place of open-ended funding under Obama. The open-ended funding by Obama provided greater flexibility to the states to manage their Medicaid program, the premiere health insurance program for low-income Americans.

Open-ended funding, by both federal and state governments, led to Medicaid expansion and brought more than 20 million people in the U.S. under the insurance net. If the state falls short of funds like in case of excess expenditure on Medicaid, it can turn to federal government for extra funding.

Trump, however, wants to cut funding on Medicaid by giving a block of fund to each state after which the states will have to solely manage their Medicaid funding, without recourse to federal funds in case of a shortfall. This will however take away flexibility. It is being widely anticipated that in order to manage their funds, the state governments might cut off benefits under Medicaid, impose premium or make other changes such as elimination of subsidies that would make Medicaid unattractive and drive people away from getting coverage under it.

The individual mandate and Medicaid expansion under the ACA provided coverage to nearly 25 million people. A repeal of this is expected to leave 20 million people uninsured.

A threat to ACA's individual mandate provision and Medicaid expansion spell trouble for companies with Medicaid-centric business such as Molina Healthcare, Centene and WellCare Health Plans WCG . The stocks of these three companies have suffered the most since Nov 9, 2016, the day when the outcome of election was revealed.

Also, hospital stocks like Universal Health Services, Inc. UHS , HCA Holdings, Inc. HCA , LifePoint Health Inc. Tenet Healthcare Corporation THC , and Community Health Systems, Inc. CYH have suffered on concerns that an increase in the uninsured rate will see them serving more poor patients and patients having to pay them on their own (without insurance cover). This would lead to an increase in bad debts for these companies, which has been an eye sore for almost all the players across the industry.

Though the executive order serves as instruction to government agencies and departments on how to operate in a certain area, nothing as of now is certain. But the proposals and many options under considerations are enough to send jitters across the healthcare space.

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Molina Healthcare Inc (MOH): Free Stock Analysis Report

WellCare Health Plans, Inc. (WCG): Free Stock Analysis Report

Centene Corporation (CNC): Free Stock Analysis Report

Universal Health Services, Inc. (UHS): Free Stock Analysis Report

Tenet Healthcare Corporation (THC): Free Stock Analysis Report

Community Health Systems, Inc. (CYH): Free Stock Analysis Report

HCA Holdings, Inc. (HCA): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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