Supreme Court can't stop 'reform'

March 26, 2012

When it comes to health care businesses, what the U.S. Supreme Court decides on the 2010 health reform law almost doesn’t matter.

That’s been a truism spoken quietly but consistently over the past two years as calls for repeal and a multi-state legal challenge have both taken aim to undo the Patient Protection and Affordable Care Act.

“Regardless of the outcome of the case, the forces that compelled the reform law in the first place are still in place—above-GDP cost growth, demographics,” Les Funtleyder, who manages a health care mutual fund for Miller Tabak & Co. in New York, wrote in a March 19 research note.

Health care spending has grown at roughly twice the rate of inflation for decades. And now that the eldest baby boomers are hitting their mid-60s, they will certainly drive spending even higher.

Employers and governments are crying “Uncle,” and the number of uninsured Americans has continued to climb.

The health reform law tries to deal with that rising spending by driving down the rates the federal Medicare program pays to doctors and hospitals and by changing the way those payments are made to make the hospitals more financially responsible for the health of their patients.

Those trends—lower reimbursements and more risk-bearing by hospitals—are bound to continue even without the law, said Ed Abel, a hospital accountant at Indianapolis-based Blue & Co.

“The law pushes it quicker, but what the law doesn’t do, private industry will,” he said.

Indeed, Funtleyder agreed that hospitals have the most to lose before the Supreme Court. The legal challenge, brought by 26 states, argues that the law’s expansion of Medicaid coverage (to an estimated 15 million more people) and its requirement that nearly all Americans buy health insurance (expected to add another 15 million customers), are both unconstitutional.

Losing out on those new customers will hurt hospitals and, to a lesser extent, pharmaceutical companies, which have built their business models on ever-rising consumption of health care.

“So in our view the innovators and cost controllers will do well under almost any scenario while the over utilizers will not,” Funtleyder added.

That means companies using information technology to make health care more efficient will likely see more investment and growing sales. Indianapolis-based WellPoint Inc., for example, has partnered with IBM to use its Watson supercomputer to recommend treatment options and diagnoses to doctors. WellPoint hopes it improves care and therefore saves money.

But WellPoint—and its peers and investors—are particularly concerned that the Supreme Court will decide to strike down part of the health reform law and leave other aspects in place.

In addition to the “individual mandate” that requires nearly all Americans to buy health insurance, the health reform law also requires insurers to accept any willing customer, regardless of that person’s health condition.

If the insurers were required to take all comers—but Americans were allowed to wait to get sick before buying coverage—they could find themselves with huge new costs without much new revenue.

Funtleyder expects the Obama administration and Congress to step in before that happens, but he acknowledges his is a minority view on Wall Street.

For medical-device companies such as Bloomington-based Cook Group and Warsaw-based Zimmer Holdings Inc., seeing the law completely overturned would be preferable. They have argued strenuously against a 2.3-percent tax on their revenue that the law will institute.

On top of that, most medical-device makers sell directly to hospitals, not to patients. So having 30 million more people with health insurance doesn’t obviously benefit them. Either way, however, medical-device companies know their innovations of the future must help health care providers save money, not just extend or improve patients' lives.

The Supreme Court will take up the individual mandate on Tuesday and the expansion of Medicaid on Wednesday. It is expected to issue a ruling in late June or early July.


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