Wall Street Thinks It Knows the Future of Obamacare—Why?

By Matthew O'Brien

Nobody except Justice Anthony Kennedy knows what will happen to Obamacare. But Wall Street, whose predictive powers are dubious, thinks it does. The proof is in the healthcare stocks.


The below chart shows Aetna's stock price the past week. Check out the vertical action today. That's a single day increase of over 6.5 percent.

Aetna.png
It's not just Aetna. UnitedHealth Group, Humana, and Wellpoint are all up between 2 and 5 percent on the day too. What's going on?

One reasonable conclusion is that Wall Street's betting that Obamacare will either be struck down in its entirety or upheld in its entirety. Both would be very, very good news for healthcare companies. The death of the individual mandate, alone, would be bad news for Big Insurance.

Here's why. Obamacare functions as a tripod. The first leg requires insurance companies to end discrimination against people with pre-existing conditions. This is called "guaranteed issue." But if everybody can get insurance whenever they are sick, then only the sick will get insurance. Guaranteed issue can't exist on its own.

The first leg needs a second leg: a mandate to force everybody, sick or well, to get insurance. The forced risk-sharing allows insurers to remain profitable -- perhaps even more so than before -- despite covering more sick people.

But millions of people without insurance can't afford it. So the second leg needs a third leg, which is subsidies for people who cannot afford compulsory insurance on their own.

The worst possible outcome for healthcare insurers is if the Court only invalidates the individual mandate, kicking out the second leg of the tripod. Insurers won't be able to ditch the sick, but the healthy will ditch them. Adverse selection will quite viciously do its work on their bottom lines.

The Court knows this. Perennial swing vote Justice Kennedy suggested that just striking down the mandate would be irresponsible because of what it would do to insurers. It would be better to rule all or nothing on the law. Markets noticed. Those comments were enough to send healthcare stocks up an impressive amount on Thursday.

Wall Street has decided that whatever the fate of Obamacare, the result will be good for health insurers. Whether it's quite so good for the sick and uninsured remains to be seen.

This article available online at:

http://www.theatlantic.com/business/archive/2012/03/wall-street-thinks-it-knows-the-future-of-obamacare-why/255244/