Many believed that the White House had a relatively stronger case in this second major challenge to the Affordable Care Act (aka ObamaCare) before the U.S. Supreme Court, but few seemed to believe that the White House’s position would be endorsed by such a wide margin.
The U.S. Supreme Court’s 6-3 decision upholding the government’s contention on the insurance exchanges will likely go some way in discouraging further challenges to this contentious piece of legislation, with Justice Scalia in his dissenting note going to the extent of calling the law ‘SCOTUSCare.’ However, today’s verdict will likely further harden the GOP’s resolve to dismantle it. This aside, today’s verdict goes some way towards reducing the uncertainty that was plaguing the healthcare space lately.
The Biggest Gainers
Legal and political pundits will discuss the Supreme Court decision’s political implications, but our focus in this short note is solely restricted to what it means for the many companies in this important sector of the economy, particularly for the health insurers. There is no question that today’s unambiguous verdict is a big positive for the healthcare ‘facilities’ players like hospital companies. After all, HCA Inc. (HCA) had filed an amicus curiae brief in support of the White House position, claiming in essence that the law was working as intended and striking down the subsidies through the exchanges would be bad for their business. No doubt, Tenet Healthcare (THC) and HCA are stocks are up big on the Supreme Court verdict.
The decision may not be as big positive for the health insurers as it is for the hospitals and other facilities operators, but it is nevertheless helpful as it helps clear the way for any lingering questions about the future of the newly insured millions of customers. Health insurers were originally expected to be the big victims in the run-up to ObamaCare’s enactment; the law was believed to be the death-knell for many operators in this space. But most of those fears have proved to be largely unfounded. That said, the law has limited insurers’ pricing powers and forced them to live under a tougher and more restrictive regulatory regime even though it has created a large pool of new customers for their services.
The Future of Health Insurance – Low Margins
Specifically about the health insurance space, ObamaCare’s biggest impact has been to convert an industry with differentiated and high-margin services to one offering largely commoditized low-margin ones. Not only are the newly insured low margins by statutory design, but even the insurers' ability to ‘price’ their existing customer pools is more restricted now compared to the past.
And we know from history that scale becomes key to succeeding in low-margin commoditized industries. The ‘urge to merge’ in the health insurance space is largely a function of this realization. To be fair to health insurers, not all of the merger mania is a consequence of ObamaCare. Many of their customers in the health facilities space like hospital operators and drug companies have bulked up in recent years. Their ability to maintain bargaining power relative to these bigger and stronger ‘customers’ requires that they bulk up as well.
UnitedHealthcare (UNH) and Anthem (ANTM), the two biggest players in the space, are looking at the three smaller players — Humana (HUM), Aetna (AET) and Cigna (CI) — to solidify their positions. But perhaps smaller players would like to come together on their own to strengthen their competitive positioning. Regulators will play a key role in any of these combinations, as they will have a bearing on consumer choice and pricing.
The strong gains in health insurance stocks lately is largely a function of two factors: the industry’s consolidation potential and the less-than-scary results of ObamaCare. Both of these trends should continue in the near to medium term, though regulatory response on anti-trust grounds will determine the future of the consolidation drive.
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