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General Electric Company (GE), WellPoint, Inc. (WLP): Five Ways Obamacare Will Succeed

With the passing of the Patient Protection and Affordable Care Act in 2010, also known in shorthand as Obamacare, lawmakers and President Obama ushered in the winds of change in the health-care industry. Having witnessed the successful implementation of socialized and subsidized health care in Canada and Switzerland — and seeing the average health-care premiums paid by employers and individuals rise by 62% and 82%, respectively, from 2000 to 2010 — the time had come in 2010 to make sweeping reforms… and the PPACA was it!

General Electric Company (GE)

Both sides of the aisle have presented very convincing and heated arguments over the past couple of years about why Obamacare is right or wrong for America. It nearly didn’t make it into law when the constitutionality of its individual mandate, as well as other aspects of the bill, was brought into question in the highest of all U.S. courts — the Supreme Court – last year. However, in June the Supreme Court ruled in favor of upholding the validity and nearly all aspects of the PPACA, paving the way for its full implementation by 2014.

Source: WhiteHouse on Flickr.

Whether you’re for or against Obamacare, it’s clear that advantages and disadvantages exist. Today, I plan to focus on the advantages of Obamacare and lay out five ways that it will succeed in bettering our health-care system.

1. It will reduce hospitals’ exposure to doubtful accounts.
Under our current system, no one is required by mandate to carry insurance. This means that any of the 48.6 million uninsured Americans as of the end of 2011, according to the U.S. Census Bureau, could walk into a hospital and receive stabilizing treatment in an emergency room since public hospitals can’t turn away people in need of care, regardless of their financial status.

Unfortunately for many hospitals, this has exposed them to a rather large annual provision for doubtful accounts (those accounts where treatment is given but payment goes uncollected). In 2012, HCA Holdings Inc (NYSE:HCA), the largest hospital operator in the U.S., generated $36.8 billion in revenue, but set aside $3.77 billion, or 10.25%, for doubtful accounts. The smaller rival of HCA Holdings Inc (NYSE:HCA), Tenet Healthcare Corp (NYSE:THC), set aside less on a percentage basis in 2012, just 7.9% of total revenue. But it also saw its provision for doubtful accounts rise by nearly 10% year-over-year.

Obamacare will solve the majority of this problem by mandating that employers with more than 50 employees provide health-care solutions to their employees, and that individuals and small business with fewer than 50 employees get health insurance either themselves or through their state’s insurance pool. With fewer uninsured and underinsured people walking into hospital emergency rooms, hospitals will be setting significantly less aside for doubtful accounts and should ultimately see a boost to their bottom line. This boost in profits could be used to reward shareholders through share repurchases or a dividend payout, but, in all likelihood, it could be used to buy state-of-the-art medical equipment that will help differentiate their hospital from peers and improve the quality of patient care.

2. It will bring 16 million previously uninsured Americans under the Medicaid umbrella.
The Congressional Budget Office and Joint Committee on Taxation put their heads and estimates together in a July 2012 report and have concluded that the net result of Obamacare will expand insurance to up to 30 million people by the end of the decade. The more important figure I see is the 16 million currently uninsured lower income individuals who will be brought into the fold under the Medicaid expansion.

The Medicaid expansion — which will completely pay for the lowest income earners while subsidizing those who make up to 400% of the Federal poverty level — will be financed by a combination of higher taxes on upper income earners and the medical device excise tax, which is a 2.3% tax of total revenue for medical device makers.

Insurers with little exposure to government-run Medicaid have been making big bets that a steady stream of newly insured people will translate into big profits. WellPoint, Inc. (NYSE:WLP), for instance, ponied up $4.46 billion in cash to buy Amerigroup in July in order to become the largest Medicaid company by membership, surpassing UnitedHealth Group Inc. (NYSE:UNH). The 43% premium paid for Amerigroup was astoundingly expensive, placing the company at more than 18 times forward earnings, but should add $1 per year in EPS by 2015. However, I feel this speaks more to the growing quality of care that lower income earners will be soon be able to receive since many, due to the high costs of premiums or through their employers, had been shut out of the health-care system.

3. It will cap insurers’ profits and require them to spend 80% of premium costs on health-care services.

In years past, the ability of insurers to raise premium costs was predominantly at their own discretion. By raising premiums, insurers certainly ran the risk of scaring off its members — or prospective members — to competing insurers, but this was rarely the case. Similar to how property and casualty insurers operate by hiking premiums after a large catastrophe loss, health insurers used similar methods, such as higher health-care and drug costs — and one need only look at the high price of orphan drugs like Alexion Pharmaceuticals, Inc. (NASDAQ:ALXN)‘ Soliris, which is tipping the scales at $400,000 for a full year of treatment — to garner huge premium hikes.

Those big premium hikes could be a thing of the past with the PPACA capping their profit with the implementation of the 80/20 rule. For starters, it disallows insurers from raising their premiums just for the sake of profit and requires insurers to explain to the state (or states) why a premium hike of more than 10% is justified.

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