On Thursday June 28, the Supreme Court announced it was upholding most of President Obama’s health-care overhaul law, saying it was authorized by Congress’s power to levy taxes.
Health-Care Reform Snapshot
The key elements to the Health-Care Reform Law:
- Individual mandate: almost everyone is required to be insured or must pay a fine. Mandate takes effect in 2014.
- Expansion of the federal-state Medicaid insurance program.
- Creating and implementing state health exchanges: whereby small businesses, the self-employed and the uninsured can choose a plan, with the same purchasing power as a larger entity.
- Attempting to rationalize the system and increase affordability for individuals in a number of ways, including charging companies a fee that don’t provide health insurance, not allowing the cancellation of insurance policies if the insured get sick and not allowing the denial of coverage to children with pre-existing health conditions.
Supreme-Court Ruling Snapshot
- The ruling upheld the individual mandate requiring nearly all Americans to obtain health insurance or pay a penalty. The Court’s rationale was that it could reasonably be considered a tax and that “because the Constitution permits such a tax, it is not our role to forbid it, or to pass upon its wisdom or fairness.” (The Court rejected the argument that the individual mandate was justified by Congress’ power to regulate interstate commerce.)The ruling on this point was 5-4, with Chief Justice Roberts siding with the more liberal wing of the Court.
- The Court did limit significantly the part of the health-care reform law that expanded Medicaid, the program that provides health care to the poor and disabled. The ruling on this point was 5-4 with Chief Justice Roberts siding with the more conservative wing of the Court.
||Peter Lefkin, senior vice president of government and external affairs for Allianz of America, offers this viewpoint on the Court’s decision:
"The basic inclination of the Courts is to give deference to the legislature, and in order to do so, Chief Justice Roberts had to convert the individual mandate requirements to tax allowed under the Constitution, rather than an interstate commerce issue, where it might not have withstood legal scrutiny. In doing so, he probably was intensely aware of the huge divide that exists in our society, and the hostility to the Court that was already engendered by the Bush v. Gore decision in 2000.
The individual mandate is the area of the law which might actually be the easiest one to implement anyway. More difficult will be finding funding for the expansion of Medicaid, creating and implementing the state health exchanges and attempting to rationalize the system away from a fee-for-service system in order to make it more affordable."
||Ken Tsuboi, CFA, portfolio manager on the AGI/RCM health-care team, discusses what the decision means for investors:
- Health-care providers should benefit. Keep in mind that the American Hospital Association struck a bargain during the negotiation phases that would call for cuts in reimbursement and funding that would amount to $155 billion over the course of 10 years. The cuts would be back-end loaded. In return, there is a calculated benefit of over $180 billion in terms of broader coverage and reductions in bad debt. Hospital executives indicated that margins would expand by over 2% in some cases by 2014, when the health-care reform law goes into effect. Accordingly, we are seeing a strong positive reaction with the acute care provider stocks.
- For health-care insurers, the ruling is status quo for the time being. However, because the health-care reform law would drive more people to lower-margin health-care insurance exchanges from higher-margin employer-sponsored insurance margins are expected to decline by 0.75% to 1% over the next four to five years.
- Medicaid expansion: The Court ruled that there is limited power to terminate state Medicaid funds, which means that Medicaid expansion can occur—just that the federal government cannot pull funding if the state does not comply. That is, the ruling does not preclude the expansion of Medicaid. Accordingly, we are seeing a strong rally in the Medicaid-related stocks and a decline in shares of the commercial managed-care stocks.