How firms will win, lose with court ruling on health law

NEW YORK -- Insurers and other health care companies are facing costly new restrictions and fees under the health care reform law. The Republicans, the party most associated with big business, hate it. So if President Obama's health care overhaul is repealed by the Supreme Court this month, companies would rejoice, right?

Well, not all of them.

For many companies, overturning the law could mean less profit, not more. Certain health care insurers and hospitals could no longer expect to get payments from millions of newly insured patients.

What's more, health care experts say many big companies want to see the law upheld because they've worked hard to adapt to it and fear legislation replacing it might prove more costly to them.

"There's no guarantee that Washington wouldn't come up with something more disruptive," said Matthew Coffina, a health care analyst at Morningstar, a research firm. "You have to worry about what comes next."

The Supreme Court is expected to rule on the law, called the Affordable Care Act, by the end of the month. The justices will decide whether Congress went beyond its authority in the Constitution in passing it. They could throw out all of the convoluted law, part of it or decide to keep it intact.

Opponents have focused on the so-called individual mandate. This requires virtually every U.S. resident to carry health insurance. Most of the estimated 50 million currently uninsured will be able to obtain taxpayer-subsidized coverage, either through an expansion of Medicaid eligibility or new markets for private insurance called exchanges. Some people are exempt from the mandate, illegal immigrants, for example.

Here is how some companies will win or lose under four possible rulings by the high court.

---

Scenario 1: The court throws out the individual mandate but keeps the rest of the law.

Hospitals could find themselves in the sick ward.

Hospitals have to foot at least some of the bill when uninsured patients show up for treatment. The law would help put an end to that by requiring most people to get coverage. Cut the requirement, and hospitals would have to continue paying out of pocket. Plus they would still have to swallow Medicare cuts in the law.

Though it's not clear investors are anticipating this, they have been selling stock of hospital chains lately.

But investors should be careful not to overreact. If the high court rejects the individual mandate, hospitals would still be better off than if there were no law. The tax credit to help pay for insurance and the expansion of Medicaid might remain. That would make it easier for millions of uninsured people to get coverage, meaning fewer nonpaying patients.

Some insurers could get hit, too.

In a partial repeal, the law would still require insurers to offer policies to people with prior medical conditions such as diabetes and cancer. That raises the prospect of only costly, sick people signing up for coverage. Healthy people who would otherwise help pay for sick people's bills with their premium payments might choose to stay uninsured. After all, they could always sign up for coverage once they got ill.

This is why the Obama administration has asked the court to get rid of the coverage guarantee if the mandate is thrown out.

But, again, investors shouldn't overreact. Insurers could limit losses under this scenario by dropping out of the business of directly selling coverage to individuals and sticking with just employer-sponsored plans. Or they could decide to stay in the individual market and recoup the cost of covering their new, sick customers by raising premiums.

---

Scenario 2: The court repeals the individual mandate and the new coverage rules.

Insurers would win.

They wouldn't have to worry about people signing up for coverage only after they got sick. They could just reject them. The tax credit and Medicaid expansion would remain. Experts expect many uninsured would take advantage of those incentives to get coverage, and insurers would make more money.

"You have the market you have today, plus you have subsidies," said Robert Laszewski, president of Health Policy and Strategy Associates, a consulting firm in Washington D.C. "That's Disneyland."

Whether investors think the high court is likely to rule this way is another matter. Since the judges began reviewing the case three months ago, they've been selling managed care stocks, pushing a dozen of them down an average 9 percent, according to Bespoke Investment, a research firm.

---

Scenario 3: The court repeals the entire law.

Insurers focused on Medicaid recipients could lose.

Of the estimated 30 million people gaining coverage under the law, more than half are expected to benefit from the expansion of eligibility requirements for Medicaid, the federal-state program for low income families. Take away the law, and you take away those new customers.

But it's unclear how much insurance stocks would fall, if at all. Morningstar's Coffina said he doesn't think Medicaid will pay as much in premiums for the new recipients as they do for the elderly, blind or disabled already in the program. And so he questions whether insurers specializing in Medicaid will lose much if the law is repealed.

The stocks of two big insurers in this area -- Centene Corp. and Molina Healthcare -- are down more than 30 percent in the past three months. But Coffina said those companies have struggled with mispriced policies and other issues unrelated to the health care law.

For the rest of the insurance industry, not much is likely to change in a full repeal.

The law requires them to provide new benefits such as preventive care with no copayments and coverage for young adults until age 26 on a parent's plan. So it might seem that their costs would fall if the law is struck down.

But insurers are already charging higher premiums for family plans to compensate for these younger customers. The costs aren't that steep anyway -- less than 2 percent in additional annual costs to the insurers, Coffina estimates.

One winner could be drug companies. Under the law, they have agreed to pay a fee and cut the price of some medicines. Medicare recipients with high prescription drug costs are getting discounts averaging about $600. The companies could stop offering discounts if the law is repealed, though Wall Street stock experts who follow the industry aren't sure.

---

Scenario 4: The court keeps the law.

In a sense, health care companies, and their investors, win.

Laszewski, the consultant, said insurers and drugmakers know the problems and costs of the law, and have already spent time and money complying with it, and so many don't want it thrown out. Plus, they fear that the vacuum that a repeal would create could be filled with a more restrictive, more costly overhaul in the future.

"No one really likes this law, but what's the alternative?" Laszewski said. "It's easier to fix a law in place with obvious flaws than starting over from scratch."