In a stunning Supreme Court decision Thursday, conservative Chief Justice John Roberts led a 5-4 majority in upholding nearly all of President Barack Obama’s signature health care reform law — including the controversial requirement that nearly all Americans must purchase health insurance by 2014, or pay a fine if they don’t.
What didn’t survive the High Court’s landmark ruling? If states decide not to expand their Medicaid programs to cover their low-income citizens under 65 as the 2,700-page law requires, Congress can’t retaliate by taking away all of their Medicaid funding.
The Affordable Care Act (ACA) ruling was such a shocker because few observers believed Roberts, a George W. Bush appointee who served in Ronald Reagan’s Justice Department, would cast his lot with the court’s four liberals.
As often happens in such high-profile cases, the justices used some fairly circuitous logic to get to the final ruling. Last week, I broke down the four questions they had to answer in deciding the case. Here’s how they actually ruled on each one:
1. Does the Anti-Injunction Act apply? No. The court said this act, which says citizens can’t sue the government over a tax that hasn’t yet taken effect, doesn’t apply because the law describes it as a “penalty” not a “tax.”
2. Does “severability” kill the entire ACA? No. The court concluded that the law could stand even if one or more of its provisions was struck down.
3. Is the “individual mandate” constitutional? Yes – but only as a tax, not as a penalty. This seems to directly contradict the first ruling, but that’s what makes Supreme Court opinions inscrutable to the average American. The Constitution does not give Congress the power to impose the individual mandate as part of its authority to regulate commerce. However, since Congress does have the power to levy taxes, the court simply called the individual mandate a tax and let it stand as law.
In other words, Congress can’t legally force you to buy health insurance. But as the justices said, “it makes going without insurance just another thing the government taxes, like buying gasoline or earning income.”
4. Can Congress force states to comply with Obamacare? No. The federal government may not withhold funds for states that elect not to expand their Medicaid programs as the ACA requires. “The threatened loss of over 10% of a State’s overall budget is economic dragooning that leaves the states with no real option but to acquiesce in the Medicaid expansion,” the court said.
But in the realpolitik of Washington, one thing is certain: Whether you’re an Obamacare lover or hater, this fight is far from over. President Obama and congressional Democrats are taking victory laps today, while presumptive GOP presidential nominee Mitt Romney vows to “repeal and replace” the law on his “first day as president.”
What About Stocks?
The market’s initial reaction to the ruling was swift and decisive — and also somewhat counterintuitive.
Hospital stocks that will be stressed if states drop out of the Medicaid expansion were having a pretty good day on Thursday. HCA Holdings (NYSE:HCA), Health Management Associates (NYSE:HMA), LifePoint Hospitals (NYSE:LPNT), Universal Health Services (NYSE:UHS) and Tenet Healthcare (NYSE:TNT) were up an average of more than 6% at midday. Medicaid-reliant stocks like Molina Healthcare (NYSE:MOH), Centene (NYSE:CNC) and Amerigroup (NYSE:AGP) were up by more than 5%.
But health insurers and managed care providers, which could now have some 30 million new customers, weren’t feeling a lot of love. Shares of Humana (NYSE:HUM), Cigna (NYSE:CI) and Aetna (NYSE: AET) were down about 2% and WellPoint (NYSE:WLP) was down more than 4%.
However, don’t worry about these stocks just yet — the ruling’s full impact will take a little time to sink in. Expect considerable short-term volatility across the sector. And just because the Supreme Court has affirmed that most of the ACA is constitutional doesn’t mean the battle is over. It will simply switch fronts to the political arena.
Since the federal government can’t take away states’ funding if they fail to expand their Medicaid programs, many will simply maintain the Medicaid status quo. While it’s too soon to guess how many ultimately will decide not to comply with that part of the law, it’s almost certain to include the 26 states that sued the Health & Human Services Department over the ACA.
Here are a few likely winners and losers in the health care sector as a result of the ruling:
1. Hospital stocks. If low-income individuals under 65 can’t obtain coverage under Medicaid — and can’t afford to pay for private insurance — hospitals in particular will continue to suffer. Expect Republicans to try to lend a hand to hospitals by advancing tort reform proposals after the November election. Now is not the best time to buy into the hospital stocks above.
2. Medical device and nursing home stocks. Medical device stocks were trending down about 1% on Thursday, which is understandable because there was no reprieve for the 2.3% excise tax on medical devices. I’d pass on Medtronic (NYSE: MDT), St. Jude Medical (NYSE:STJ), Covidien (NYSE:COV) and Boston Scientifics (NYSE:BSX). Expect this sector to be in a slump for the near term.
Ditto for shares of nursing home chains including Sun Healthcare (NASDAQ:SUNH), Skilled Healthcare (NYSE:SKH) and Kindred Healthcare (NYSE:KND).
1. Health care IT stocks. Making the ACA work in practice requires massive — and blindingly fast — information exchange. It also calls for implementing electronic health records (EHRs), privacy and security standards, and transformational use of info tech. The stocks that have real potential to shine include Mediware Information Systems (NASDAQ:MEDW), AthenaHealth (NASDAQ:ATHN), HealthStream (NASDAQ: HSTM), Cerner (NASDAQ:CERN), McKesson (NYSE:MCK) and Quality Systems (NASDAQ:QSII).
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.