Volatile oil prices, financial turmoil in Greece, Federal Reserve interest rate hikes. These are the main risk factors investors are trying to gauge as 2015 gets rolling.
Another potential shock, however, is hiding in plain sight, even though there hasn't been much chatter about how it might affect the stock market or the economy. In early March, the Supreme Court will hear a challenge to the Affordable Care Act that could upend the entire law if the court sides with the plaintiffs.
The decision, due by early summer, will come with little advance warning but could promptly suck billions of dollars out of the consumer economy. “The individual insurance market would become very unstable,” says Christine Eibner, a Rand senior economist. “There’d be a massive decline in enrollment, which would have a very destabilizing effect.”
The plaintiffs in the case, known as King v. Burwell, contend that the language of the ACA does not allow the federal government to offer insurance subsidies to people in states that don’t operate their own exchange for purchasing insurance. Defenders of the law argue that the suit hinges on a technicality that’s at odds with the intent of the law. At least some of the justices clearly feel otherwise (given that they agreed to hear the case in the first place), and if they side with the plaintiffs, Obamacare could enter a so-called death spiral in which millions lose subsidies and bail out of the program, costs skyrocket for the remaining enrollees and the ACA basically collapses.
Impact on health insurers
Since 34 states use the federal exchange for Obamacare, as the ACA is known, an overturn could directly impact the majority of people getting insurance through the law. Two new studies estimate the ugly consequences of a victory by the plaintiffs. The Robert Wood Johnson Foundation (RWJF) projects that 8.2 million Americans would lose insurance, with premiums for individual insurance (not offered through a company group plan) rising 35% in the those states. The worst damage would occur in Texas (where 1.6 million would lose insurance) and Florida (1.2 million).
A separate study by the Rand Corp. found that 9.6 million people would lose insurance, with premiums in those 34 states rising by 47%. For a 40-year-old nonsmoker buying a mid-range plan, the extra cost would total about $1,610 per year--unless, of course, he chose to forego insurance.
Among those who'd be hit hard by the decision would probably be health insurers such as UnitedHealth (UNH), Wellpoint (ANTM), Cigna (CI) and Aetna (AET). Those firms have been big winners under Obamacare, since they’ve gained new customers and revenue, financed in part by those federal subsidies. Shares of those four firms are up by 19% to 40% during the last 12 months, with the iShares Health Care ETF (IHF), which invests in such insurers, up 25%. All of them have handily outperformed the S&P 500 index, which is up just 10% over the same period. There’s been no unusual selloff in insurer stocks during recent weeks, which suggests shareholders might get caught by surprise if the Supreme Court were to suddenly shrink the insurers’ customer base.
Departures from the market
The 8 to 9 million Americans who would lose subsidies would obviously suffer a tangible hardship, too. RWJF estimates those consumers would lose subsidies and tax credits worth about $29 billion in 2016, and $340 billion over 10 years. Some of those people would probably pay more for unsubsidized health insurance they could buy directly from an insurer, which would cut the amount of disposable income left to spend on other things.
Many others would probably forego insurance altogether, deeming it unaffordable. They’d save the money previously spent on insurance premiums, but become highly vulnerable to the ruinous consequences of a serious illness. Medical debt is already the main cause of personal bankrtupcy, a problem that would probably worsen.
Those subsidies, of course, include money Washington is spending now but wouldn’t spend in the future. So federal spending would decline slightly as liberals and conservatives waged the bottomless argument over whether such money is better spent helping the less fortunate or reducing the tax burden on higher earners. (Even the Supreme Court couldn’t resolve that one.)
Congress could pre-empt this whole drama by passing a new law that clears up the confusion by unambiguously declaring federal subsidies valid in every state, regardless of how they’re administered. But Congress isn’t going to do that, because both houses are now controlled by Republicans who oppose the ACA in part or in its entirety. Even some Democrats who strongly supported the legislation when it passed in 2010 (when their party controlled both chambers) have turned on the law, which has never enjoyed support higher than about 45% percent of Americans. The law has been working fairly smoothly heading into its second year of full implementation, but damage caused by the disastrous rollout of Healthcare.gov in 2013, along with bad publicity surrounding several million people who lost healthcare coverage they liked due to the law's new restrictions, seem to have caused lasting damage to Obama and other Democrats who championed the ACA.
If Obamacare does come undone, there will still be around 150 million Americans covered by health insurance through an employer, with another 47 million covered by Medicare. Those markets ought to remain stable, although medical costs seem likely to continue rising by more than inflation, for a variety of reasons. And some employers have dialed back on healthcare benefits while directing workers and their families to the Obamacare exchanges, a trend they might have to reverse. Still, most Americans wouldn’t suffer directly from the Supreme Court decision, if it goes against Obamacare.
But after a turbulent five-year period of adjusting to the ACA, the health insurance industry would quake. The turmoil might stay contained if mostly everything else in the economy is going smoothly. But if there are other strains, such as an unexpected jump in oil and gas prices, a Greek departure from the euro zone or something unforeseen, the unraveling of the ACA could hit the overall economy much harder, if it happens. That distinct possibility makes it a risk to watch in 2015.
Rick Newman’s latest book is Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.