Obama's 2nd Term: Decks Cleared For Continued Affordable Care Act Execution

by: Chandrasekhar Rajagopalan

The decks seem to be cleared for the continued affordable care act or ACA implementation in healthcare reforms following the victory of U.S. President Barack Obama for a second term. However, challenges continue to remain for the President to overcome in his second stint.

Obama is credited for introducing healthcare reform in March 2010 and the legislation continues to remain controversial, with some states questioning it in a Federal court. However, the U.S. Supreme Court gave a 5 - 4 ruling in favor the reforms in June 2012 and held the law as constitutional. The Supreme Court has also given an option to states to participate in the healthcare reform or not. This has suited the Republican-ruled states, which are not eager to implement the reforms.

While the re-election of Obama clears the path for the continued execution of the ACA, there are challenges such as creation of state healthcare exchanges, Medical device tax and Medicaid expansion. Many states were slow on the development of health insurance exchanges. This seems to have been the case wherever a Republican is governor. They are reluctant to support the healthcare reform for various reasons, including the support to the program from 2016.

In the presidential elections, healthcare reform was one of the hot topics during the campaign. The ACA enabled over 86K U.S. citizens to enroll in the Pre-Existing Condition plan. This insurance plan allows people who have diabetes and heart disease to be enrolled themselves. Therefore, the victory of Obama means the continuation of ACA.

However, the program was not as successful as Obama would have liked it to be. About 50 million U.S. citizens lack health insurance. Of this, half of them are affected by pre-existing conditions.

Meanwhile, S&P Capital IQ predicts that 16 million newly insured U.S. citizens will be added to Medicaid rolls in the next decade due to Medicaid eligibility expansion. The research firm also believes that most of the states will finally agree to the expansion. This is due to the fact that many states are currently contributing 40% - 50% of Medicaid funding. Therefore, a 10% cap by 2020 will be generous.

The continuation of ACA is naturally good for some health insurance companies. S&P Capital IQ sees that Medicaid expansion would be a positive factor for health insurers like UnitedHealth (NYSE:UNH), Molina Healthcare (NYSE:MOH), WellCare Health Plans (NYSE:WCG), Health Net (NYSE:HNT), Aetna (NYSE:AET) and WellPoint (WLP).

While the re-election of Obama is viewed positively for the continuation of healthcare reforms, there are concerns over the hospital sector. This is because the admissions policy, which remains pressured due to the modest economic recovery witnessed in many important markets. Aside from this, regulators' scrutiny of admission practices to hospitals has increased outpatient rates. This will carry lower margins.

Meanwhile, Goldman Sachs predicts 30 million+ patients in commercial and Medicaid coverage expansion. The brokerage says that increased regulation means higher economies of scale and lower margin volatility. On the headwinds, Goldman Sachs lists new underwriting rules for commercial markets in 2014, the transition to lower medical advantage reimbursement benchmarks (2012 - 2017), as well as the introduction of an 85% minimum MLR floor.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.