ACA at the Supreme Court – What You Should Know

Richard
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This note summarizes the events leading up to the Supreme Court’s likely review of the Affordable Care Act (ACA), and attempts to handicap the timing and outcome of the review

We anticipate a verdict in or around June of 2012. Whether the individual mandate to purchase health coverage is upheld is effectively a coin-toss. If the mandate is struck down, the odds of ACA being struck down in its entirety are extremely low. Rather, we believe the Court would either find the mandate completely severable from ACA; or (marginally more likely) would find that commercial insurance market provisions such as guaranteed issue and the requirement to cover pre-existing conditions are at least partially reliant on the mandate, thus striking these provisions from the Act

The economic relevance of the individual mandate (and thus the penalty) appears to be overestimated. The penalty appears far too small to prevent catastrophic adverse selection; at best, the penalty can only delay the rate at which these pressures build. Even if the penalty remains in place, the marginal cost of buying the cheapest possible coverage should double in the first decade of the Act, to the point at which even subsidized households’ marginal costs for health insurance – never mind co-pays and deductibles for actual care – claim a share of income on par with essentials such as groceries and utilitie

Believing consensus overestimates both the economic relevance of the mandate and the odds of ACA being struck down, a series of exploitable share price effects may emerge. For example estimates for commercial HMOs and Facilities may overreact to either verdict, setting the stage for revisions-driven relative performance (or underperformance) in the wake of a verdict upholding (or vacating) the individual mandate. And, subsectors with unidirectional risks that hinge on the broader question of whether ACA remains intact may overestimate the odds of an ACA repeal as a verdict approaches, setting the stage for related contrarian bets. Innovative manufacturers (drugs, biotech, med tech) stand to gain if ACA-associated taxes are eliminated; conversely Medicaid HMOs stand to lose if ACA-associated expansions of Medicaid eligibility are rolled back

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