You Read it Here First
The health care ruling came three months after an extraordinary series of oral arguments in which the differences on the bench, if not the ultimate outcome, were disclosed in sharp relief. A majority of the court, including the conservative chief justice, John G. Roberts Jr., affirmed the central legislative pillar of Mr. Obama’s term, voting 5 to 4 to uphold the law’s individual mandate provision and thus the entire law, as authorized by Congress’ power to levy taxes.
The court upheld the provision as a tax, but found that it does violate the Commerce Clause. The decision did significantly restrict one portion of the law: the expansion of Medicaid, the government health-insurance program for low-income and sick people, giving states some flexibility not to expand their Medicaid programs without paying the same financial penalties that the law called for. In short, the Court decided that if a state does not expand the Medicaid program, as required by the law, the federal government cannot withhold Medicaid funds.
According to Think Progress:
The entire ACA is upheld, with the exception that the federal government’s power to terminate states’ Medicaid funds is narrowly read.
A Political Split
A Court Tainted by Politics: As many had predicted, the Court continued its long-term trend of splitting by political affiliation and ideology. The four liberal justices, Stephen Breyer, Ruth Bader Ginsburg, Elena Kagan and Sonia Sotomayor, joined in the decision. Justices Samuel Alito, Anthony Kennedy, Antonin Scalia and Clarence Thomas dissented.
Chief Justice John Roberts joined Justices Sonya Sotomayor, Stephen Breyer, Ruth Bader Ginsburg, and Elena Kagan in the 5 to 4 decision.
Although conservative Justice Anthony Kennedy — who was considered a swing vote on in the case — sided with the conservatives, the swing vote came from conservative Chief Justice, John G. Roberts Jr.
A Tale of Two Judges: Although Thomas’ wife had crusaded against the law, he failed to do the proper thing and recuse himself from the decision. Justice Kennedy’s decision is to be lauded for its political independence.
A Significant Decision
Many observers called the case the most significant before the court since at least the 2000 Bush v. Gore ruling, which decided a presidential election.
The court ruling is a crucial victory for the law passed in 2010 that is intended to end the United States’ status as the only rich country with large numbers of uninsured people, by expanding both the private market and Medicaid.
Tens of millions of people are expected to gain insurance from the law, according to the Congressional Budget Office, as part of a march toward universal coverage, a goal that has eluded legislators and presidents – including Franklin Delano Roosevelt, Harry S. Truman, Lyndon B. Johnson, Richard M. Nixon and Bill Clinton – for generations.
The law’s centrepiece takes effect in 2014, at the same time that the law would prohibit insurance companies from denying coverage to people with existing health problems. Most experts had said the coverage guarantee would balloon costs unless virtually all people joined the insurance pool.
Most Americans already are insured. The law provides subsidies to help uninsured middle-class households pay premiums and expands federal health care for poor people.
The key provision that 26 states opposing the law had challenged – known as the individual mandate – requires virtually all citizens to buy health insurance meeting minimum federal standards or to pay a fine if they refuse.
Many conservatives considered the mandate unconstitutional, arguing that if the federal government could compel people to buy health insurance, it could compel them to buy almost anything, with broccoli becoming the central example in court arguments.
The mandate’s advocates said it was necessary to ensure that not only sick people but also healthy individuals would sign up for coverage, keeping insurance premiums more affordable. The law offers subsidies to poorer and middle-class households, varying with their incomes. It also provides subsidies to some businesses for insuring their workers.
Although there were some exceptions, in the lower courts most judges appointed by Democrats voted to uphold the law, while most appointed by Republicans voted to reject at least part of it.
Why The Decision Was Inevitable
Here is what I wrote about why the Supreme Court was likely to uphold the Individual Mandate
An article by Slate makes the case that mandated coverage is not only consistent with current employer health care practice, but a de facto effective practice already. To understand this, you need to consider the principles of insurance and the history of employer-sponsored health insurance plans.
The history of employer provided health coverage in the U.S. dates back to World War II. During the war, to maximize war production, numerous government controls were put in place, including wage controls, price controls, rationing, and intense social pressure to invest in low-yield war bonds to depress domestic consumption. The idea was to devote as large a share of output as possible to the war cause. Since wage controls led to windfall profits for some firms, which were then subject to high taxation, employers hit upon the idea of offering workers non-wage benefits including, among other things, health insurance.
in 1943, the IRS ruled that employer contributions to a health insurance plan didn’t count as taxable income, giving firms an incentive to offer some compensation in the form of insurance. In 1954, Congress codified this in Section 106 of the Internal Revenue Code, a decision that is one of the two pillars of the current American insurance system.
The second pillar is the rule that employers need to offer health coverage on the same terms to all full-time employees. This is partly risk management, but a tax issue as well.
The insurance principle: A healthy young worker pays the same premium as a middle-aged one with high blood pressure. This ensures that within any given firm there’s considerable cross-subsidy flowing from younger and healthier workers to older and sicker ones. If all the young people dropped out of the plan, then the premiums charged to the remaining members would need to go way up. That’s because the healthier employees are, on average, receiving fewer dollars per year in health care services than they and their employers are paying into the plan in premiums.
The tax principle: If employers stopped subsidizing employee insurance premiums and just raised their salaries instead, thousands of dollars of tax-free subsidies would become taxable income. If an employees opted out of the insurance pool, it would cost them hundreds of dollars in taxes. But without that penalty, people would drop out of employer-provided insurance pools, leading to higher premiums, more dropouts, leading to even higher premiums. The system would become unworkable. Because this principle operates invisibly in the background, it is mistaken for the operation of a “free market”. But is it, really?
The non-taxation of group health plans is actually a government program that, according to the Congressional Research Service will cost the federal government $164.7 billion in fiscal year 2014. This is funded by taxes on everyone – including those who don’t benefit from the deduction, including many entrepreneurs, part-timers, freelancers, or small-business owners.
Although we can’t be certain about how the Supreme Court will rule on the Affordable Care Act, the individual mandate is consistent with the principles of insurance and is likely essential to make the Act work to expand coverage to most Americans.
Will Stocks Rise Again On The News?
Immediately after the beginning of the judicial review, on Friday, March 30th, health insurance stocks reached a 52-week high following three days of review. UnitedHealth was up 17 cents, WellPoint up 19 cents, Aetna up 59 cents, and Humana Up $1.12. This was partly because the Supreme Court Justices’ original queries and comments, as they discussed the ACA appeared to show that the Justices were more concerned about the welfare of health insurers than the uninsured. These were small gains in 2% to 3% range, and it seems that investors may well have been reacting to the President’s emphatic endorsement of mandates. Investors seemed to recognize that the mandate means that a surge in enrollment is coming for health insurers, followed by a flood of new revenue.
Yet, following the Supreme Court announcement, stocks were divided:
- Hospital stocks rallied: Hospital operators, and companies that own hospitals, celebrated the ruling. “Hospitals are going to be compensated for the uninsured that they cover,” said Robb Granado, senior analyst at Sageworks. “It’s a positive for hospitals. It takes away a lot of uncertainty.” HCA Holdings (HCA,Fortune 500), United Health Services (UHS, Fortune 500), Community Health Systems (CYH,Fortune 500), Health Management Associates (HMA, Fortune 500), Tenet Healthcare Corp (THC,Fortune 500)., and Vanguard Health Systems Inc. (VHS,Fortune 500) surged between 5% to 9%.
- Providers of Medicare and Medicaid also got a substantial lift. Wellcare Health Plans (WCG, Fortune 500) rose 8% and Amerigroup (AGP,Fortune 500) jumped 5%. Centene Corp. (CNC, Fortune 500) rose 3% and Molina Healthcare (MOH, Fortune 500) rose 4%.
- Health insurances stocks slumped significantly.Wellpoint Inc. (WLP, Fortune 500), Unitedhealth Group (UNH,Fortune 500), Aetna Group (AET, Fortune 500), Humana Inc. (HUM, Fortune 500) and Cigna Health Group (CI, Fortune 500) dropped between 2% to 5%.
We’ll keep our eyes on the trends to see what develops. Here’s an outlook on how it may affect stocks of the various stakeholders.