The Chaos That Overturning Obamacare Could Cause

The debate over the Affordable Care Act, or Obamacare, has reached the Supreme Court, and soon our nation's top justices will decide its constitutional fate -- in particular, its individual mandate. There are passionate arguments for and against Obamacare and the individual mandate, but as investors, what we should be worried about is how the ruling could affect our investments.

The outcome of the court decision and Congress' reaction is unknown for now, but if the individual mandate is struck down, it could be terrible for one industry, which might surprise you.

The theory behind Obamacare
The Affordable Care Act is built on the thesis that if everybody is in the health-care system, it will bring down costs for everyone. An analogous, although far less complicated, system is car insurance. Everyone who drives is required to have car insurance, because if some drivers don't have car insurance, it raises costs for everyone else.

If I get in an accident with someone who has car insurance, the insurance companies pay for the damage, minus deductibles. The amounts for both sides are negotiable, but as an overall system this is efficient, because there's not a lot of wasted cost.

In another example, if I get into an accident with someone who doesn't have car insurance, the problem becomes much more complicated. If it's the other person's fault, and he's responsible for the damages, he could choose not to pay, which would leave me or my insurance company to sue that person, costing much more for the system than the original damage.

The same goes for health care. As an overall system, it is more efficient to have everyone get regular physicals, receive preventative care, and avoid filling the emergency room. As it is, the emergency room has become the place for care for millions of Americans who are paying little or nothing into the system to get care. This is the most costly and inefficient way for the entire system to run.

The theory behind Obamacare is that we want everyone in the system paying something, even if we have to subsidize a large percentage of the population, to bring down the overall costs of the health-care system. Whether you have pre-existing conditions, you're perfectly healthy, you're planning on having kids, or whatever -- as long as you're in the system, the costs are spread out and overall costs will be lower than the price of having millions of people getting care in the emergency room.

That's the theory.

What if the mandate is struck down?
If only the individual mandate is struck down, that means the government won't be able to require people to have health insurance or fine individuals or companies if they don't. That decision could send us into a state of chaos, especially if there's no backup plan as President Obama said this week.

If insurers were still required to take any new customer, regardless of pre-existing conditions, what benefit will there be to having insurance? As a contractor who has to buy his own insurance, I'll have no reason to get any. I haven't been to a hospital or clinic in seven years, so my cost has been zero, and if I get deathly ill I can sign up for insurance on the way to the hospital and get care as if I'd been a card-carrying insurance member for life.

That outcome would throw costs out of whack for the system, and it would create chaos for insurers and consumers. Those who chose to have insurance all the time would have to pay for people like me, who could choose to be parasites on the system, raising rates to even higher levels.

And how would UnitedHealth Group (NYS: UNH) , WellPoint (NYS: WLP) , and Aetna (NYS: AET) predict costs in a system where customers come and go on a whim? Insurance premiums are based on expected costs for a group of patients, but if patients come to insurance companies only in their greatest time of need, it would throw off any existing models.

Companies would lose an incentive to insure workers as well. McDonald's (NYS: MCD) has already tried to find ways around the mandate, asking regulators to waive part of the law for the company, and the elimination of the mandate would allow more companies to cut benefits.

Most Americans still get insurance through work, and a fine of employers for not providing insurance would have at least encouraged that system to continue. If the individual mandate is overturned, what's to keep companies from dropping insurance all together, especially if costs go up?

The land of unintended consequiences
Conservative CNN contributor David Frum predicted on Monday that this outcome would eventually lead to an actual government takeover of health care, as Medicare and Medicaid costs skyrocketed and insurance premiums rose. The spiraling costs would lead the government to act by taking over the system. It's a bold prediction, but I tend to agree -- unless something is done to mitigate the potential chaos that could ensue after the Supreme Court's ruling.

In all of the outrage over the poorly understood Obamacare bill, people often fail to remember that insurance stocks rose after it passed and haven't quit ever since. Coventry Health Care (NYS: CVH) , Aetna, UnitedHealth Group, and WellPoint are all near 52-week highs, and worries over the Supreme Court's eventual decision didn't take hold one way or the other last week. But having more people involved in a stable system is good for insurance, and having fewer people in a chaotic system is bad. If the individual mandate is overturned, I think insurance companies will be the ones that suffer the most.

What do you think? Sound off in the comments section below.

At the time this article was published Fool contributor Travis Hoium has insurance, but he has no a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.Motley Fool newsletter services have recommended buying shares of Coventry Health Care, McDonald's, UnitedHealth Group, and WellPoint. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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Who is this guy "Hoium"" and who is he kidding? Sounds like just another media jerk enfatuated with this way Leftist President and his attempts to socialize everything. What this brilliant author neglects to mention in his starry-eyed drooling over this monstrosity of a health bill is the enormous increase in costs if it is upheld.
Current projections were this 2800 + page monstosity passed through are an increase of about 100 million/year just in administrative costs--and most of that isn't from including new people in health insurance.
Rather it's from further expansion of an already bloated federal government and its employees (with their ridiculous benefit, holiday and pension costs) of at least an additional 30,000 NEW federal employees!

And also in case Mr. "Hoium" didn't actually notice, the entire 2800 page monstrosity has NOT ONE providion to hold down or control costs, one of the supposed chief objectives of any healthcare reform. Oh yes, of course not one word about badly needly medical malpractice reform--can't imagine why that might be.
I'm sure it has nothing to do with the huge financial support Obama has received from the very wealthy trial lawyers lobby!

So contrary to the political manipulation that media turkeys like this guy are trying in desperate bids to salvage this doomed disaster of a bill, passing it or upholding it would severely increase costs and the federal bureaucracy, without any evidence that it will improve anyone's health status.

Other than that, it's a great law...

April 16 2012 at 3:45 PM Report abuse rate up rate down Reply

Will not get in to the debate, but having a hard time separating this issue from others very similiar. Whether the Supreme court guts it by just overturning the mandate or throws the whole thing out, what should be the next case/cases they hear? Medicare and SS? To me these are no different and have been with us a very long time. Have you or your employer tried to opt out of the 7.65% each pay against every dollar you earn? Correction for high earners--+$110,000, but just on SS. Please explain this to me, preferably without polictically dogmatic ranting and raving.

April 09 2012 at 9:11 AM Report abuse rate up rate down Reply
Don Kiss

We need to get the government out of healthcare.

April 07 2012 at 8:55 PM Report abuse rate up rate down Reply
1 reply to Don Kiss's comment

Tad late for that.

April 09 2012 at 9:00 AM Report abuse rate up rate down Reply

I think you are completly full of liberal ****!

April 07 2012 at 5:35 PM Report abuse +1 rate up rate down Reply

And it is exactly what will happen. Fed takes over and all will be on medicare. Great. Michelle gets her wish. Tell EVERYONE what to eat and how much. Then we will just be left to die when deemed too costly or too old. GREAT.

April 06 2012 at 5:40 PM Report abuse +2 rate up rate down Reply
1 reply to wdog257's comment

It is ouf of hand when statements like this are made. First ladies always champion an issue. Trying to persuade people to pursue a healthier diet is a bad thing? When Nancy was singing "just say NO", were you singing "take those drugs if you want them"

April 09 2012 at 9:15 AM Report abuse rate up rate down Reply

And the act itself has not caused chaos? More misleading crap from Huff Puff, we swallow anything, Post.

April 06 2012 at 5:10 PM Report abuse +3 rate up rate down Reply