Foes of Obamacare were dealt a major blow on Thursday. In a closely watched 6-3 decision, the Supreme Court concluded in King v. Burwell that the wording of the Affordable Care Act (ACA or Obamacare if you prefer) allows those signing up through the federal healthcare exchange access to subsidies. This had been called into question by plaintiffs in the suit and their supporters — which included Republican governors in Alabama, Georgia, Indiana, Nebraska, Oklahoma, South Carolina, and West Virginia — who held that wording in one section of the law could be interpreted as making subsidies available only through state exchanges. A ruling against subsidies through the federal exchange Healthcare.gov would have made insurance unaffordable again for approximately 6 million Americans, and almost certainly would have sent Obamacare into an unsustainable death spiral.
Worse for Obamacare foes, the ruling makes repeal more difficult in another way. Chief Justice John Roberts, writing for the majority, suggested that the so-called “Chevron Deference” did not apply to this case. Named for a 1984 Supreme Court case, the Chevron deference states that ambiguous wording in a law should be a matter for the regulating agency to work out in the implementation. Roberts argued that the tax credits are of such central importance to the law that the issue was not one for the IRS to interpret but for the courts to decide.
By removing the ambiguity issue, the Court has made it more difficult for a Republican president to thwart Obamacare through the use of executive powers on regulation and enforcement. Repeal now requires signed legislation passing both houses of Congress, and the longer Obamacare is in place, the more difficult it will be for any fully Republican government to replace it with an alternative.
There will still be plenty of media blather and political posturing, but like it or not, Obamacare is here to stay. Now what happens? One likely result is the relatively rapid demise of the state exchanges in favor of the federal exchange.
Supremacy of the Federal Exchange
After an undeniably difficult start, Healthcare.gov managed to get its footing and is now operating with far less problems. That is not the case for state exchanges. Even the success stories are having difficulties — Washington’s and Minnesota’s exchange are experiencing “substantial information technology problems” according to the New York Times — and the Washington Post reports that almost half the states are dealing with financial difficulties.
As more of the financial burden falls on state exchanges, and by extension state governments, most states are likely to say, “Why bother?” Now that the Supreme Court has opened subsidies to all qualifying US residents regardless of where they live, expect the state exchange to be a rare sight down the road.
Hospitals, insurers benefit from the decision
We can also turn our attention to how well the law is working on both the care level and the financial level. The major intent of Obamacare was to increase health coverage for all by partially subsidizing insurance for poorer and sicker Americans, and spreading the risk throughout the healthy in a controllable form. Recall that a pivotal point of the initial Supreme Court decision was that Obamacare is effectively a tax, via the mandated coverage with penalties for failure to comply.
Certainly, it has succeeded in increasing the rolls of the insured. According to the National Center for Health Statistics, 8.8 million Americans that were previously without insurance acquired coverage in 2014, representing a 20 percent drop in the uninsured. This shouldn’t be a surprise to anyone, given that the law is a mandate for health coverage.
On the financial front, the Obamacare news seems to be positive as well. Investors sent health care stocks soaring after the ruling, particularly those of insurance companies and hospitals. Among the winners of the day immediately after the ruling were Tenet Healthcare (NYSE:THC) up 9.23 percent, Hospital Corporations of America (NYSE:HCA), up 8.34 percent, and Universal Health Services (NYSE:UHS), up 8.51 percent. Insurance companies rose but to a lesser extent, with Cigna (NYSE:CI) up 0.37 percent and Aetna (NYSE:AET) up 2.04 percent.
These reactions of the market are not surprising. With an adverse decision, hospitals would likely have been deluged with emergency room visits from the previously insured that had lost their subsidies, causing massive unrecoverable expense. As for insurance companies, they now have a greater degree of certainty on the healthcare rules.
With respect to costs, the situation is mixed. Healthcare costs continue to rise. They had been doing so at a lower rate than in the past, but the most recent data from the Census Bureau’s Quarterly Services Survey shows health care spending increasing 7.3 percent year over year in Q1 2015 with a 9.2 percent increase in hospital spending. Spending is up because the services are being used more often, exactly as planned.
Meanwhile, the recent CBO report on the costs of repealing Obamacare showed that the deficit would increase by $137 billion over the next ten years using dynamic scoring to predict the overall economic effects (estimating the ripple effect throughout the economy), and an increase of $353 billion using the old scoring rules. Progressives are touting this as showing Obamacare’s effectiveness, but more likely, it just reflects the potential chaos of yet another huge shift in healthcare policy. The report states clearly that the uncertainty with the assumptions means that the actual deficit could vary in either direction, high or low, beyond the estimate. Like many long-term projections, the CBO report is basically in dartboard territory.
The takeaway
Health care stocks rightly rose on the King v. Burwell decision and they are likely to stay strong for some time, even given a bit of positive overreaction. Revenues of companies in this sector have stabilized, and most have already adapted to the new realm of Obamacare through mergers and acquisitions, as well as other cost-cutting measures. As an investor, you want to look for relative over/underpricing within the healthcare market, and that will have more to do with their management than with Obamacare.
Meanwhile, as a second year of Obamacare works toward a close, we should have more solid data about how well it’s working in other meaningful ways. Will more affluent consumers be fed up with higher premiums and revolt (the ACA certainly didn’t make their insurance affordable)? Will the uninsured ranks continue to fall or will the numbers level out, and will the quality of care increase, stay flat, or decrease? And finally, will the downward bending of the cost curve finally materialize? Thanks to the Supreme Court ruling, it’s time to focus on these other questions instead of the potential non-existence of Obamacare.