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US healthcare system: Implications of the Supreme Court’s Decision on the Obama Reform

US healthcare system: Implications of the Supreme Court’s Decision on the Obama Reform

17.7.2012 10:28
Autor: KŠB, KSB

The extensive 2,700 page Act was vigorously endorsed by President Obama. The Supreme Court’s highly anticipated and politicized ruling has broad consequences for the U.S. healthcare system.

The outcome of the Supreme Court’s decision was far from certain. The Act contains a controversial provision which requires U.S. citizens to either obtain health insurance or pay a penalty. Critics claim this provision of the Act is unconstitutional.

The rationale behind the Supreme Court’s decision came as a surprise. Chief Justice Roberts offered the decisive swing vote in the Court’s decision. In a 5 to 4 ruling, the Court held the mandate exceeded Congress’ authority under the Commerce Clause, with Chief Justice Roberts aligning with the conservative majority. Yet in another narrow 5 to 4 ruling, the Chief Justice sided with the four more liberal justices of the Court in finding that the penalty was permissible because it actually functioned as a tax.

The Chief Justice wrote, “the Affordable Care Act’s requirement that certain individuals pay a penalty for not obtaining health insurance may reasonably be characterized as a tax.” The Chief Justice asserted that “if an individual does not maintain health insurance, the only consequence is that he must make an additional payment to the IRS when he pays his taxes.” The dissent harshly criticized the characterization of the penalty as a tax, stating the Chief Justice’s opinion took “verbal wizardry too far, deep into the forbidden land of the sophists.”


From an investment standpoint, the Act could have negative long-term consequences for medical insurance providers and medical device companies, as both sectors will face increased costs stemming from heightened governmental regulation. However, the Act could also benefit publically traded hospitals by improving access to health care and expanding insurance coverage. The fate of the Act also may depend on the result of the November presidential election, as Republican candidate Mitt Romney vowed to repeal the law if elected.

In 2010 more than 50 million Americans lacked health insurance, approximately 17% of the nation. The Act is intended to make health care more accessible and affordable. In an effort to accomplish these objectives the Act expands the scope of Medicaid. Through these mechanisms and other reforms the Act is projected to reduce the medically uninsured population in the U.S. by approximately 32 million. Because of the broad nature of the Act different provisions will go into effect at different times.

Although the Act does not establish universal health care or a single-payer system, the reform of the private health insurance industry is wide-reaching and comprehensive. The Act establishes health insurance exchanges to allow consumers to compare different insurance options. Through a combination of incentives and penalties the Act encourages employers to provide health insurance for their employees, and dependent children are allowed to remain on their parents’ health insurance plan until the age of 26. The Act prohibits insurance companies from placing lifetime limits on coverage, or rescinding coverage except in instances of fraud. The Act also prohibits insurance companies from denying individuals coverage based on preexisting conditions.

Individual Mandate into effect beginning in 2014

The most controversial provision of the Act is the individual mandate, which requires U.S. citizens and legal residents to obtain health insurance and levies a financial penalty on individuals who fail to acquire coverage. The individual mandate will be phased into effect beginning in 2014. Drafters of the Act perceived the mandate as necessary to counter the “adverse selection spiral,” which posits that individuals will only buy health insurance if they believe the value of the insurance outweighs the cost. For instance, a young, healthy individual may choose not to buy insurance if he believes it is unlikely he will become sick and actually need insurance. By requiring everyone to purchase insurance the Act attempts to pool the risk of all U.S. citizens, healthy and unhealthy alike. This pooling of risk (usual in Europe) is required to permit many of the Act’s other provisions which would make health care more affordable and accessible for the sick, poor or elderly.

While the health care industry lobbied strongly against the Act, the consequences of the Act upon the industry are not wholly negative. Although the Act establishes more stringent governmental regulations and oversight, approximately 30 million more Americans will buy health insurance and be able pay for medical services. Health insurance companies were particularly opposed to the Act, yet insurance companies have generally performed well since the Act passed in 2010. Large health insurance providers such as UnitedHealth Group, WellPoint (62,7 USD, -0,79%), and Aetna have seen significant increases in share price over the last two years. Additionally, the Act will likely benefit the hospital industry, as there will be fewer unpaid hospital bills.

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