Obamacare Faces a Supreme Challenge

by Wendy Simmons | October 25, 2011 1:17 pm

One of the GOP’s most important issues for the 2012 presidential election is destined for a date with the Supreme Court. The U.S. Department of Justice made a surprise decision a few weeks ago to ask the high court to hear a case regarding President Barack Obama’s Affordable Care Act (a.k.a. “Obamacare”) during its current term.

Four different lawsuits currently are in line for possible Supreme Court review. Although there are several types of challenges and possible outcomes[1], the most important and likely to be ruled upon is the “individual mandate” aspect of the law. This provision of the law requires almost all Americans to purchase health insurance. It is the logical and fiscal base of the reset of the legislation. If the mandate is struck down, much, if not all, of the rest of the law would be costly to implement. A decision of some kind most likely will come down before the 2012 presidential election[2].

Republican presidential candidates have been united in opposing the health care reform bill and demanding its full repeal. They have two basic arguments. First, they claim the bill is unconstitutional because Congress does not have the express power to require individuals to buy a product. Second, they assert the cost of implementing the law and the uncertainty of how it actually works is preventing firms from hiring. It appears the Supreme Court will weigh in on the first argument and, depending on its ruling, we might get to see whether the second has any real merit.

Some legal scholars believe the only certain decision to come from the Supreme Court will be over the individual mandate. If it is upheld — as the Obama administration feels confident it will be — the GOP likely will have the wind knocked out of its “repeal and replace” sails. But what will the implications be if the high court decides it is indeed unconstitutional to require individuals to buy insurance? This would not immediately negate the rest of the legislation, but the effects of such an split outcome could be dire. Let’s think through the possible ramifications for various stakeholders.

Insurance Companies

The health insurance sector lobbied hard against health care reform but ended up getting a fairly good deal out of the legislation. With Obamacare, the sector was handed a lot of new customers. (Imagine for a second what would happen to the car industry if, by 2014, almost everyone in America had to own a car.) In fact, the passage of Obamacare, as well as the following uncertainty surrounding it, has not had a big impact on the sector as a whole[3].

The catch for insurance companies, of course, is they now cannot deny insurance to those with pre-existing conditions, nor can they kick patients out of the program after they get sick. If Obamacare is fully repealed and these companies no longer are required to “take everyone,” they might lose patients in the aggregate but will be back in control of accepting only those that are healthy and most likely to be profitable.

On the other hand, if only the individual mandate is struck down, insurance premiums could soar as the healthiest patients will not be forced into the system but insurance companies still will have to take the sickest (and most costly) people.

Pharmaceutical Companies

Large drug companies could suffer from the repeal of the individual mandate. Obamacare levies quite a few new taxes on various industries, including pharmaceuticals. These taxes take effect in the short term but supposedly will be offset by the coming deluge of newly insured customers that will need drugs and have coverage for them. If we no longer are mandated to buy health insurance, the number of new drug customers will not grow as expected under current law.

Businesses With Large Numbers of Hourly Employees

Under current law, business owners with more than 50 employees will be required to provide health insurance to their full-time employees — even if they are hourly — by 2014 or face a fine.  (Technically this is a “shared responsibility fee.”) Supposedly the tax credits and state exchanges will mitigate some of that cost, but it seems unlikely that profits will not suffer at all from the added fees.

Fast-food franchisees and their corporate parents in particular have resisted health care reform. Many of these business models rely on armies of hourly employees that do not currently receive health benefits. McDonald’s already has gone to great lengths to get exemptions from the law. None other than Herman Cain, the GOP’s rising star, first brought the agenda of the fast-food industry to bear on the conversation by challenging Bill Clinton on reform[4] 16 years ago.

If the individual mandate is struck down and premiums rise (see health insurance explanation above), these business owners, both large and small, will be hit by a double whammy of spiraling premiums and extra fees.

People Who Make More Than $250,000 Per Year

Obamacare levies a 3.8% tax on investment income starting in 2013 and a 0.09% increase in Medicare tax for these high earners. These high earners obviously have a lot to gain from full repeal of the law but a lot to lose if only the individual mandate is struck down but not the new taxes that come along with it.

Young Adults

Under current law, parents are allowed to keep adult children on their own health care plan until age 26. Indeed, this requirement has contributed to a significant increase in coverage[5] for these young Americans. In the current job market, young people are experiencing the highest rates of unemployment among all age groups. The ability to stay on their family’s policy is particularly important. If Obamacare is fully repealed, these young Americans likely will lose coverage. If only the individual mandate is struck down, they might continue to have access to their parents’ insurance plans, but at a much higher cost.

  1. several types of challenges and possible outcomes: http://www.politico.com/news/stories/1011/66667.html
  2. before the 2012 presidential election: http://www.nytimes.com/2011/09/29/us/justice-dept-asks-supreme-court-for-health-care-ruling.html?_r=1&hp
  3. not had a big impact on the sector as a whole: https://investorplace.com/2011/07/obamacare-court-health-industry-investors/
  4. by challenging Bill Clinton on reform: http://www.washingtonpost.com/blogs/ezra-klein/post/cain-vs-clinton-a-flashback/2011/08/25/gIQAhG1T1L_blog.html
  5. significant increase in coverage: http://www.gallup.com/poll/149558/Significantly-Fewer-Year-Olds-Uninsured.aspx

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