A Look At How Possible Court Decisions Will Impact the Federal Government, For-Profit Health Care Industry

In a matter of days, the U.S. Supreme Court will issue its decision on the constitutionality of the Patient Protection and Affordable Care Act. Analysis continues to be generated looking at the winners and losers under different scenarios. This post looks at how the federal government and certain for-profit health care providers and suppliers would be impacted by different possible Court decisions.

The federal government

Politico reported on June 7 that if the Court strikes down the individual mandate in the law, but leaves much of the rest of the law in place, Congress could reap a short term windfall. “If the court kills just the parts of the law that cost money, while leaving in place new taxes and spending cuts, that would leave more cash on the government’s books. If the whole law is struck down, the deficit would actually go up a bit. And if it’s upheld, there’s no change at all to the budget,” according to Politico’s analysis. (Eliminating the individual mandate would lead to about $282 billion in savings to the federal government over 10 years, according to the Congressional Budget Office).

While the government would no longer be collecting an estimated $27 billion in penalties from individuals who opted not to purchase insurance coverage (if the individual mandate is deemed unconstitutional), it would spend $149 billion less on Medicaid over 10 years, $69 billion less in subsidies to states to establish health insurance exchanges; receive increased tax revenues of $80 billion (if the taxes included in the law were not repealed); and see $11 billion in miscellaneous savings.

If the court also repeals the Medicaid expansion included in the law, the savings to the federal government would be even greater over 10 years.

For-profit hospitals

Moody’s Investor Services looked at three possible Court decisions and their impacts on three key healthcare providers and suppliers. The three possible decisions include (1) the Court decides the law is constitutional and it stands; (2) the Court strikes down the individual mandate and leaves the rest of the law intact; and (3) the Court strikes down the individual mandate, as well as the rest of the law.

If the Court lets the law stand as is, for profit hospitals would benefit because a significant drag on profitability — bad debts — would be alleviated. According to Moody’s “The expansion of healthcare coverage would lessen hospital operators’ exposure to bad debts, which in turn would improve margins and cash flow at for-profit hospitals.” Bad debt expense exceeds 10% of revenue for operators of for-profit hospitals.

If the Court strikes down the mandate but leaves the rest of the law in place, “bad-debt expenses would continue to increase, although at a slower rate than the current rate,” according to Moody’s, “because the expansion of Medicaid coverage contemplated in the law would remain in effect, while Medicare reimbursement-rate increases would decelerate.”

If the Court repeals the entire law, the impact would be “neutral to slightly negative because costs would rise for treating patients who can’t pay their bills,” according to the Moody’s analysis. Hospitals that see a high number of patients in emergency room settings would be impacted more than hospitals that do not have emergency rooms.

Medical device manufacturers

The biggest impact on medical device manufacturers is the 2.3% tax on devices, starting in 2013, which is a major source of funding for the entire law. On June 7, 2012, the House of Representatives voted to repeal this tax; the Senate is not likely to approve repealing the tax.

According to Moody’s many device companies are planning cost cuts to help offset the effects of this tax. Although the tax is deductible as a business expense to companies, the effective tax rate would still be 1.5%.

A scenario where the mandate was overturned but the rest of the law was kept in place would be particularly bad for device companies, according to Moody’s, “because the new excise tax would still go into effect and pricing pressure on device makers from hospitals would likely get worse if hospitals don’t get bad-debt relief from reform.”

If the law was overturned, it would obviously benefit device manufacturers because they no longer would have to pay the tax.

Pharmaceutical companies

If the Court upholds the law, pharmaceutical companies face a negative credit impact because they would continue to pay for the full adoption of the health reform law in the form of higher rebates to the government for Medicaid drug costs, discounts to seniors covered under Medicare Part D drug plans, and a new industry fee. The impact on individual companies would vary—those that offer a wide variety of drugs used by Medicare and Medicaid beneficiaries would be impacted more than companies that don’t.

The total cost to pharmaceutical companies of the implementation of PPACA over 10 years is about $85 billion.

If the individual mandate is struck down but the rest of the law stands, the cost to pharmaceutical companies over 10 years would be about the same. But drug companies would be further impacted on the revenue side since a lack of an individual mandate would mean fewer people would be coming into the health care system, decreasing sales of all pharmaceuticals.

If the law is repealed outright, the pharmaceutical industry would benefit because it would no longer face the $85 billion cost to implement the law. It also would not be subject to higher rebates for drugs for Medicaid beneficiaries, or forced to provide higher discounts under Medicare Part D.

One other possibility

There is another possible option, where the Court basically makes no decision and remands the cases under consideration to the lower courts for further clarification and possible arguments. This would delay for at least a year another decision from the nation’s highest court, putting the Court’s decision (if there is one in 2013) only months away from the implementation date for most of the insurance reforms in January 2014. For the federal government, and healthcare providers and suppliers, it would mean a continuation of the current state of affairs, at least for another year.