The U.S. Supreme Court ruling came as welcome news for some, and not quite so for others. In layman terms, according to the Supreme Court, “Obamacare” did not violate the constitution by legislating that people buy healthcare insurance, or else pay a penalty. Starting in 2016, this penalty will be up to $695 or 2.5 percent of income, whichever is greater. In case of employers with more than 50 full-time employees, the employers must provide health insurance or pay a penalty ($2,000 per employee).
What the ruling means for different company stocks is that a lot of uncertainty has been removed. Although the Healthcare Sector showed mixed outcomes, the stocks of hospital chains were the clear winners. This is because the law broadens the pool of paying patients coming to the hospitals, which were often left to cover the high medical bills of the sick with no coverage. On the other hand, stocks of large health insurers fell slightly. The effect on healthcare REITs and ETFs was nominal.
The healthcare law, known formally as the Patient Protection and Affordable Care Act, is the biggest revamping of the $2.6 trillion healthcare system (18% of the U.S. economy) in about 50 years. The court’s decision largely vindicates Obama to reform a system that previously left 16 percent of Americans uninsured. This is unlike other leading economies of the world.
The U.S. healthcare system is a mixture of private insurance and government programs. The United States pays more for healthcare than any other country, but about 50 million of the roughly 310 million Americans are still deprived of insurance. The law in question is meant to bring insurance coverage to more than 30 million of the uninsured and gradually mounting medical costs.
Hospitals have been the clear winners from this ruling. A possible risk for the hospitals in future is that some people might still not buy insurance, and would prefer to pay a penalty, like in the case of Japan, where 10% of the population still have no insurance, even though it is mandatory (though there is no penalty in Japan). The penalty is not that high relative to what people would have to pay to get the insurance. The average cost of a family health insurance premium will equal 50% of the household income by the year 2021, and surpass the average household income by the year 2033. The typical coverage for a family of four in 2016, for example, will average about $5,800 (individual) and $15,000 (for a family of four), according to the Congressional Budget Office.
The ruling was bad news for insurers. UnitedHealth evaded the fate of other insurers because it does not depend as much on individual and small-group policies for its revenue. UnitedHealth also has an information technology business and a pharmacy benefits business, and is the biggest provider of Medicare Advantage plans for the elderly. WellPoint, on the other hand, draws more of its revenue from insurance on individuals and small groups.
Below is a list of points of the healthcare law that do not favor insurance companies:
- Insurers would be required to provide coverage for non-dependent children up to the age of 26.
- Insurance companies cannot deny coverage based on pre-existing health conditions. A person will be able to buy insurance for the same premium as that paid by people in good health.
- Health insurers will have to raise premiums for everyone in order to charge people with pre-existing conditions less than the expected cost of their care. Young people, for example, could see a doubling or tripling of their premiums, according to industry estimates. This might lead to lost customers who would prefer to pay the penalty.
- Loss of profits is also likely if only high risk customers come to get the coverage, while the low risk ones simply wait until they get sick to apply for insurance and then drop the coverage when they get well.
- If a person has a very expensive and continuing health problem, there will be no annual limit and no lifetime limits on their health insurance coverage.
- By 2014, health insurance exchanges are to be set up. They will be state-based and state-administered. Only government-approved insurance can be sold within the exchange. A person will be required to buy insurance from the exchange if he is not covered by any other plan. This will lead to high competition among insurers to offer the government-mandated health insurance benefit package. Smaller insurance companies will be at a disadvantage.
- A 40 percent tax would be imposed on insurance companies providing “Cadillac” health plans valued at more than $10,200 for individuals and $27,500 for families. The tax would kick in starting in 2018.
The ruling also has a negative impact on companies that sell medical devices because the healthcare law intends to utilize the lowest-cost treatment. In such a scenario, medical-device makers who begin investing in new cheaper or cost saving products should be favored in future.
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