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Last Updated on: 12th March 2015, 02:54 pm
The Affordable Care Act was one of the biggest and most controversial laws to pass in decades. This bill, commonly referred to as Obamacare, completely revamped the American healthcare system. Despite fierce Republican opposition, it looked like this bill was firmly set in place.
Everything changed this month when the Supreme Court received a new challenge to the law. The way the Court rules on King v Burwell could bring down the entire ACA which would have huge impacts on the healthcare system and the entire market.
The fundamentals of Obamacare
The Affordable Care Act mainly impacts health insurance for people buying coverage outside of work. While the law did set some new coverage requirements for large employers, the ACA’s biggest changes were for the individual market.
First, the ACA said that insurance companies could no longer rate people on pre-existing health conditions. Basically, people were guaranteed to get coverage. In exchange, the second part of the law required that everyone have health insurance. Anyone who doesn’t buy health insurance needs to pay a tax penalty to the IRS. Third, people who earned below a minimum income threshold would receive tax subsidies to help them afford health insurance.
The ACA also set up online exchanges for people to buy health insurance. People need to buy through these exchanges to qualify for the tax subsidies. While each state was supposed to set up its own exchange, the government also set up a federal exchange for people living in states without an exchange. At this point, only 16 states have their own exchanges so most of the country relies on the federal exchange. This is the key point that could bring down the ACA.
The case of King v Burwell
In the case of King v Burwell, the plaintiffs are unhappy because the ACA is forcing them to buy insurance and they believe this is an overreach of the government. The plaintiffs are from Virginia, a state that uses the federal exchange. After reviewing the bill, the plaintiffs found that while the ACA clearly states that subsidies will be delivered on state exchanges, it doesn’t clearly state that subsidies should be allowed on the federal exchange.
The plaintiffs want the Supreme Court to block the use of subsidies on the federal exchange because this would stop them from having to buy health insurance. Without subsidies, the plaintiffs wouldn’t face the tax penalty for not buying insurance because the cost of coverage would be too high. The Obama administration is arguing that the ACA clearly implies that subsidies should be available on both exchanges, even if the language isn’t 100% clear.
At this point, it’s very hard to say how the court will rule. The four liberal justices have indicated they will uphold the federal subsidies while three conservative justices are in favor of repeal. There are two justices in the middle, Roberts and Kennedy, who haven’t shown a clear opinion yet. If they both rule to get rid of the federal subsidies, it would be a huge blow for Obamacare.
Impact of a ruling against the ACA
If the court rules against the ACA, it will have a huge impact against the law. Roughly 8 million Americans use federal subsidies to buy their coverage. If the court rules against these subsidies, these Americans will see the cost of their coverage increase immediately. This would make coverage unaffordable for many of them while making insurance not worth the cost for healthy Americans. As healthy Americans drop coverage, prices would keep going up and eventually force the government to potentially drop the entire system under the ACA.
To get an idea of the potential cost increase, look at the average premium costs for health insurance in New York. Without subsidies, the average policy cost close to $1,400 a month. Once the subsidies began in 2014, the average cost fell to nearly $500. The Supreme Court ruling would drives costs back up to the pre-subsidy levels.
However, while this could be a tough shock for people relying on the subsidies, conservatives say it’s a long-term necessity for the American healthcare system. Consumer spending on healthcare outpaced every other category, including housing at the end of 2014. As healthcare costs keep going up, so will the cost of subsidies which will keep adding to the deficit.
Businesses also reported large increases in the cost they were paying for healthcare because of Obamacare and 18.2% of businesses said they were hiring fewer employees because of the law. Only 3% said they increased hiring because of the ACA. If the Supreme Court ruling reverses this trend, it could boost the American economy in the long-run.
Impact for investors
The Supreme Court ruling would have a major impact on stocks in the healthcare sector. Health insurance companies in particular received a huge boost from Obamacare as the top 5 insurance companies have all outperformed the S&P 500 over the past few years. Large hospitals and pharmaceutical companies also received a boost.
If the Supreme Court rules against the ACA, these stocks will likely give back a large part of their gains. These companies are all expecting more business from Obamacare so a reversal would be difficult to handle. Investors may want to move out of these stocks now to lock in their gains before a negative ruling.
The ruling’s impact on the overall market is hard to say. The passing of Obamacare didn’t have a noticeable impact on the stock market so a reversal may not be a major change either. There could be some economic tailwinds as the consumers who lose their subsidies will have less disposable income. However, if this ruling eventually reduces healthcare costs for companies, the ruling could have a long-run benefit for the market.
Investors should expect volatility and uncertainty in the market as we get closer ruling. It wouldn’t be a bad idea to take a more conservative position, say by moving partially out of stocks and into safer assets like gold, until the healthcare situation becomes clearer.
The Supreme Court is as divided as every other part of our dysfunctional government which makes every ruling a stressful coin flip. Investors need to keep a close eye on the King v Burwell ruling so they can prepare for both the healthcare and economic impact.