The ruling is in. After months of speculation the Supreme Court has decided that the Affordable Care Act is constitutional.
What this means is that Congress indeed has the power to mandate that Americans purchase health care insurance or pay a penalty; given that the penalties for this plan are ruled a tax, this means it is constitutional. It also prevents insurance companies from denying coverage based on pre-existing conditions. There are many legs to this, but those were the big items.
Typically, the market likes certainty and we often see rallies when big decisions are made — almost no matter what the decision is. That wasn’t the case today for two main reasons.
The first and the easiest to digest reason is that the decision doesn’t give the market any more certainty about the future of health care than we had yesterday. The truth is that we have an election in a few months and one of the parties is, to put it lightly, against the health care plan.
Immediately following the ruling House Majority Leader Eric Cantor said that the House of Representatives will vote to repeal the law on July 11. This is a symbolic move as there’s no chance that both houses of Congress will vote to repeal at this time.
But what does have some teeth are comments from Presidential candidate Mitt Romney. Just moments after the decision, Romney addressed the press and said, “As you can imagine, I disagree with the Supreme Court’s decision, and I agree with the dissent. What the court did not do on its last day in session, I will do on my first day if elected President of the United States. And that is that I will act to repeal ObamaCare.”
With polls showing that this election is neck-in-neck, it’s obvious that this debate will continue and that there is still no certainty that the Affordable Care Act will go into effect.
The second reason the market didn’t rally is a bit more complex and frightening. And that’s the cost of the plan.
What most Americans don’t realize is that there will be extra tax implications to the tune of 3.8% to foot the bill for the Affordable Care Act.
If you have “unearned income” through dividends, interest, rents, royalties, unemployment or the sale of a home, you will likely pay an extra 3.8% next year.
There is no skirting the fact that this level of taxation will send ripples through the economy and increase the fears of another recession.
So by now you’re likely asking, “OK Louis, Is it time to exit healthcare stocks or is it time to get out of the market altogether?”
Not a chance.
I own and recommend health care, biotech, pharmaceutical and medical service companies and will continue to do so throughout the rest of 2012 and beyond. And I’m certainly not recommending that anyone close up shop with their investments.
What I do recommend is that investors use opportunities to pick up shares on the cheap. I’m doing exactly that in my private and public accounts. But I also recommend that you do so with patience and an eye on the horizon. While the going may get a little rough with holidays and vacations keeping volume low on Wall Street, we do have earnings season, election excitement and a host of other events that will bring volume back to the market and into stocks with strong fundamentals.
And don’t forget that our country is in the midst of a major health care buying spree. According to the non-partisan Congressional Budget Office (CBO), spending on health care in America under current law will increase from $2.5 trillion or 17.5% of gross domestic product (GDP) in 2009 to $4.6 trillion in 2020! That means that healthcare spending will account for nearly a fifth of the nation’s GDP.
And if the Affordable Care Act survives the election, government spending will add an additional $1.2 trillion to the pot!
That’s because of the major demographic trend that ensures that Americans will spend more than ever on healthcare: The aging of America.
Every single day, 10,000 new people qualify for Medicare. That is a demographic you can’t argue or legislate away. This group of Americans will need doctor’s visits, medical tests and prescription drugs.
So, health care will remain a growth industry regardless of the changing political and legislative environment.