Why Losing the Individual Mandate is Good for HMOs, and other Earnings Consequences of Various Supreme Court Outcomes


We expect the Supreme Court to rule on the Affordable Care Act (ACA) this June/July (i.e. to find the Anti-Injunction Act does not apply), and to let the Medicaid expansion stand (driving a 13 percent gain in Medicaid spending, & a 1.3 to 1.8 percent gain in total national health spending)


Whether the individual mandate (a.k.a. minimum coverage provision) stands or falls remains very nearly a coin-toss, though odds lately seem to slightly favor the mandate being upheld. If the mandate falls, underwriting requirements (mandatory issue and comparable premiums regardless of health status) also are likely to fall, but the balance of ACA is likely to stand


If the mandate falls but underwriting requirements stand, we’re convinced state regulators prevent the feared consequences on insurers (skyrocketing adverse selection and falling risk adjusted returns); avoiding these consequences is central to having workable state-by-state health insurance markets (even if these don’t become health insurance exchanges)


And, we believe loss of the mandate ultimately is good for HMOs, especially if the underwriting provisions also fall. Losing the mandate opens the door for ACA-reluctant states to scrap plans for health insurance exchanges (HIEs); losing both the mandate and the underwriting provisions opens the door that much further. Without similarly structured and consistently regulated HIEs in all or nearly all 50 states, multi-state employers are unlikely to shift employees from employer-sponsored coverage (ESI) to the HIEs; we estimate roughly 40% of employees work for multi-state employers


Under ESI more (we estimate 5%) employees are insured at higher (we estimate 28%) average contract values; operating costs per beneficiary (employer contracts v. individual contracts) are lower; and, pricing is more stable (fewer underwriters can pitch for employers’ business than for individuals’; employers switch underwriters less often than individuals). Ironically, at present valuations we believe HMOs are underpriced even if ACA remains intact, though longer-term earnings power is much greater if the mandate falls and ESI remains the norm


We continue to recommend a pro-cyclical bias in healthcare portfolios, and in particular recommend Hospitals and Manufacturers / Distributors of non-Rx Consumables. Because Hospitals are reactive to many potential Supreme Court decisions, and because HMOs should tend to react in an opposite manner to most decisions, we believe it’s important to hold both Hospitals and HMOs around the time of the anticipated decisions (late June/early July)


We also continue to recommend against the drug trades (PBMs primarily, and also Drug Retailers and Drug Wholesalers) in anticipation of falling generic dispensing margins as the average wholesale price (AWP) benchmark is replaced. Notably, the statutes that lead to AWP being replaced are in the ACA and at risk of being vacated if the Act is struck down in its entirety; however we see this risk as minimal

Print Friendly, PDF & Email