Today the Supreme Court of the United States is expected to rule on the constitutionality of the Affordable Care Act, the Obama Administration’s hallmark healthcare legislation.
Business Insider reached out to analysts at the largest investment banks, including Bank of America Merrill Lynch, Barclays, Citibank, Credit Suisse, Goldman Sachs, Jefferies, J.P. Morgan, and UBS.
Top analysts are mostly split on the expected outcome — while traders on InTrade putting the odds the legislation’s core is ruled unconstitutional at 77.5 per cent.
But what can happen and what does it mean?
Before we jump into each of the five outcomes, it’s important to note how different parts of the healthcare industry will react to the news — a ruling one way or the other is not broadly good for the entire sector.
For-profit hospitals, for instance, generally benefit from the Affordable Care Act, as they would serve fewer uninsured Americans. Even a partial upholding of the law would increase paid hospital stays.
Under that same guise, insurance companies could see surprisingly different results — some insure small groups and individuals, while others serve large corporates, and others focus on the Medicaid eligible population. If one or parts of the law were to fall, companies could be forced to offer insurance to Americans with pre-existing conditions while missing out on the benefit of the individual mandate (healthy individuals paying for coverage).
Now, a look at each possible scenario tomorrow (barring the court decides to hear new arguments in the fall):
Affordable Care Act Is Upheld:
Photo: Credit Suisse
Most analysts have given this scenario little consideration, with Goldman saying it has one-in-four odds of occurring tomorrow.
If the Supreme Court were to uphold the ACA, it would benefit hospitals like Tenet Healthcare and LifePoint Hospitals.
Although payments for procedures would be substantively lower than currently received from managed care providers like Cigna, all procedures would be paid for in some form by the government.
At the moment, Credit Suisse estimates hospitals only receive $7 for every $100 they are owed by uninsured individuals.
Elsewhere in healthcare, stocks would likely rise. J.P. Morgan projects insurance stocks could rally as much as 12 per cent if the entirety of the law is upheld.
Still, the law faces an uphill battle following the November election as key provisions could be overturned by the legislative branch.
“Even in the event that SCOTUS upholds [the Affordable Care Act], our consultant sees a high probability that med device fee could be reversed if Republicans win Senate [or] White House in the upcoming elections,” Rajeev Jashnani of UBS says.
Individual Mandate Is Ruled Unconstitutional, But Upholds Rest Of ACA:
This scenario is particularly painful for health insurance providers, as healthy individuals could elect to go without coverage.
Eight of the 10 companies reviewed by J.P. Morgan’s Justin Lake would suffer in this outcome. Credit Suisse says hospitals would also be adversely affected under this ruling.
“We believe the full benefits to the hospitals are difficult to achieve without the mandate, in our opinion, as healthier individuals could avoid acquiring coverage without the fear of a penalty,” Ralph Giacobbe of Credit Suisse says. “The resulting adverse selection would likely put pressure on reimbursement for exchange-based coverage.”
However, there is a work around that Congress could enact to buffer insurance companies.
“In addition to the open enrollment periods there are a number of additional avenues that Congress may explore should the mandate be ruled unconstitutional,” Lake says. “In order to mitigate adverse selection and help insure a stable exchange, Congress can embed late enrollment penalties, waiting periods or potentially force continuity of coverage provisions.”
Individual Mandate And Related Provisions Struck Down:
This scenario would offer some relief to managed care organisations, as they would benefit from greater Medicaid enrollment. At the same time, firms would not be burdened from pools of less fit individuals as they avoid adverse selection.
Photo: J.P. Morgan
J.P. Morgan’s Justin Lake estimates medicaid stocks could rally as much as 10 per cent. Lake says those companies most levered to individual and small group markets would benefit, with gains likely seen at Aetna, WellPoint, and Coventry Health.
Goldman also believes insurance firms would gain on a ruling striking the mandate and provisions, but upholding Medicaid’s expansion.
“Under this scenario, we assume the commercial coverage expansion does not occur,” Goldman’s Matthew Borsch says, which would lower expected insurance pool growth. “The negative impact from this assumption is more than offset by our assumption that public company aggregate commercial risk pretax profit margins decline very modestly (about 50 bp) from the current 6% level, as compared to the 150 bp decline we assume under our base case scenario.”
Hospitals would see some relief here, as Medicaid would expand somewhat. However, the greatest upside from full phase-in of the ACA is eliminated as 13 million fewer people would gain coverage in 2014.
Medicaid Expansion Is Struck Down:
In the event medicaid expansion is struck down while other parts of the law are maintained, Congress would likely have to go back to the table to find coverage for the nation’s poverty-hit populous.
But Citi Analyst Carl McDonald estimates that many Medicaid-linked stocks could advance as investors who have been side-lined return to the table.
“The 2014 Medicaid expansion is the smallest part of the Medicaid growth pipeline, relative to state expansions and the dual eligible opportunity, so the stocks can still work even without it,” Citi’s Carl McDonald says. “We also sense there’s a lot of interest in owning Medicaid right now, but not until the overhang of the court decision is lifted.”
J.P. Morgan and Goldman Sachs view the event differently — with both saying enrollment figures would be considerably lower.
Entire Affordable Care Act Is Struck Down:
Analysts are divided over the impact this ruling would have on insurance providers. The size of the Medicaid market would be stunted, which compares to a 17 million person expansion under full phase-in in 2014.
J.P. Morgan’s Lake believes Medicaid linked stocks could tumble more than 15 per cent in the aftermath of repeal.
“Although they have the option, we doubt the states will continue with plans for expansion given that nearly all of the costs would have been picked up by the government,” he says. “It is important to note that Medicaid take up rates are somewhat dependent on the individual mandate being upheld. The Urban Institute estimates that 2.5 million fewer people would enroll in Medicaid should the individual mandate get struck down.”
Photo: Goldman Sachs
But Goldman’s Borsch believes the insurance providers would benefit from stronger margins and better risk management.”The negative impact from less coverage is significantly more than offset by the positive impact of the following modelling assumptions: Commercial risk margins are assumed to remain at approximately the current level … Medicare Advantage margins are also assumed to remain at approximately the current level,” he says.
Analysts at UBS believe other medical sectors would benefit under full repeal, while Credit Suisse estimates this would have little impact on hospitals as it follows current U.S. law.
“While there are several potential outcomes from the SCOTUS ruling, the scenario with the most obvious positive financial impact for US Med Tech would be if the entire law were overturned,” Rajeev Jashnani of UBS says.
Outside Healthcare Impact
The court’s actions tomorrow will have massive consequence on areas far removed from healthcare, with many economists concerned that it will add to the nation’s growing deficit if found to be unconstitutional.
Neil Shah of the Wall Street Journal reports full repeal could also hit payrolls, as firms try to shed healthcare costs.
Under full implementation, states may have difficulty readying programs required by the federal government because they have waited too long.
“There remain questions as to whether the health reform law can be implemented by 2014 as many states have delayed implementation awaiting the court’s decision, and the federal government may not be able to implement exchanges in all of those states,” Bank of America’s Andrew Bressler says.
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