Healthcare pullback

112014-boehnercare-thumbBY JASON NORRIS | OB CONTRIBUTOR

Each month for Oregon Business, we assess factors that are shaping current capital market activity—and what they mean to investors. Here we take a look at two major developments regarding possible rollbacks of the Affordable Care Act (ACA).

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Open Exchange

Each month for Oregon Business, we assess factors that are shaping current capital market activity — and what they mean to investors. In this post, we take a look at two major developments regarding the Affordable Care Act (ACA) that occurred in November: the U.S. Senate and Supreme Court.

This month, open enrollment began for 2015 ACA membership. While the launch of “Obamacare” last year was riddled with hiccups, this year looks to be a bit smoother. The wildcard(s) for 2015 are twofold; first a change in leadership in the U.S. Senate will bring increased legislative pressure to the act and second, the U.S. Supreme Court has stated they will hear the case involving the legality of the subsides to states that are not running their own exchanges.

Assessing the results of the election, we do not believe that Congress will attempt to repeal the entire bill; however, we do believe that they will attempt to pull provisions of the law out – with the medical device tax being a likely target.

For those who aren’t familiar with this provision, the medical device tax is a 2.3 percent tax on gross revenues of most medical devices sold in the United States. It was enacted to provide additional revenue to the Treasury to help fund the subsidies to ACA customers. The tax was estimated to raise $20 to $30 billion over the next 10 years. The House held a vote to repeal this provision and it passed with strong Republican support as well as 37 Democrats. Prior to the election, the bill did not come to a vote under Senator Harry Reid’s leadership, although there was a non-binding vote in the Senate that got 79 votes to repeal. If this legislation does get introduced in the Senate and gathers the 60 votes needed to pass, we would be surprised if President Obama vetoed it. 

Other provisions worth watching are the “individual mandate,” which are the restrictions of plans insurance companies can offer, as well as the “employer mandate.” We anticipate seeing some activity in the Senate on these issues. Whether or not President Obama vetoes them or offers a compromise remains to be seen. Due to the controversies around implementation and the results of the mid-term elections, there is more pressure than ever for Democrats to take a good look at these provisions.

The second wild card is Supreme Court activity on this issue in 2015. Early this month, the Supreme Court announced a willingness to hear arguments on the legality of subsidies paid to consumers in states that do not have a state insurance exchange. The current law states that subsidies would only go to states that ran their own exchanges; however, the Federal government has been paying subsidies to all states. If the Court rules that only those states with state-run exchanges are eligible for subsidies, then ramifications will be huge. If subsidies are not available to potential customers, then fines cannot be implemented on companies for not providing ACA-compliant healthcare plans (that is the link).

Therefore, to keep the ACA afloat, 34 states would need to implement their own state-run exchanges. Currently, most of these states are controlled by either a Republican governor or legislature (with 20 states having both). A vote to create a state-run exchange is a vote for both the employer and individual mandates, therefore it is highly unlikely to pass.

So, the $64,000 question is, how does the court rule? Justice Roberts was the lynchpin in upholding the overall law in 2012. When looking at his voting history and assessing how the ACA was written (subsidies to state-run exchanges only), we would handicap a potential decision finding that the subsidies would be illegal. Chief Justice Roberts seems to rule to the literal written meaning of a passed law. The statement he made after his ruling of the 2012 ACA legality may be relevant now.

He said, “It is not our job to protect the people from the consequences of their political choices.” With this possible decision, Congress would have to rewrite the bill and with both chambers controlled by the Republicans, very unlikely.

Although these developments may be very positive for medical device manufacturers, they could have a negative effect on the hospitals as there is a potential for a less-insured population. The wild card is the effect on the HMOs—while they have generated additional revenue from participating in the ACA exchanges, profitability has been very lean.

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With the debacle of the Cover Oregon exchange launch last year and subsequent takeover by the Feds, it is up in the air whether Oregonians are on a state or federal exchange. Oregonians participating in the 2015 enrollment will be directed to the federal exchange, for private insurance. Cover Oregon will still be involved with Medicaid enrollees. Therefore, those Oregonians signing up for private insurance may face some bad news on their subsidy eligibility when the Supreme Court rules in 2015.

Jason Norris, CFA, is executive vice president of research at Ferguson Wellman Capital ManagementFerguson Wellman is a guest blogger on the financial markets for Oregon Business.