Hospitals Warn Of "Death Spiral" if SCOTUS Strips Obamacare Subsidies

By Markets Fool.com

The U.S. hospital industry is warning of severe financial damage to the nation's health care system should the U.S. Supreme Court eliminate subsidies for certain Americans who bought private health insurance coverage under the Affordable Care Act.

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A specific financial cost to hospitals has not been determined, but it's clear that the rulingcould damage hospital company stocks. According to research from the RAND corporation, Obamacare enrollment numbers stand to drop byan estimated 9.6 milliondue to patientswho purchased private individual coverage in the 34 states that rely on the federal exchange losing subsidies.

Major hospital trade groups and lobbies filed a friend-of-the-court briefon January 28 in King v. Burwell, the case that will essentially decide whether subsidies in those 34 states are illegal based on specific language in the Affordable Care Act. A few words in the ACA say an exchange should be established by the state, though the legislation's supporters note the law also has provisions for the federal government to run the exchange if the states don't. The legislation's challengers say it should be up to the individual state to decide whether to have any exchange, much like states can opt out of the law's Medicaid expansion. These opponents are primarily making the case that federal subsidies in the states using the federally-run healthcare.gov are illegal.

The organizations that filed the brief are: the American Hospital Association; the Association of American Medical Colleges, which represents academic medical centers; America's Essential Hospitals, which represents public hospitals; and the Federation of American Hospitals, which represents investor-owned hospital chains including Community Health Systems, HCA Holdings, LifePoint Hospitals, and Tenet Healthcare.

The organizations opine that the language of the ACA does indeed support the subsidies: "Petitioners believe that language supports their quest to cut off subsidies, but it does not. On the contrary, the Act's definitional sections make clear that (Section 36B) extends subsidies to residents of every state, including those with federally facilitated exchanges."

However, the concern is that if the Supreme Court were to disagree and rule the federal subsidies illegal, rising premiums could end up derailing the law. "A market without subsidies will trigger a premium 'death spiral' in those states (with federally facilitated exchanges)," the hospital lobbies argued in their brief. "With subsides gone and premiums pushed higher, younger and healthier patients would drop coverage," the brief adds, highlighting the biggest threat posed by an unfavorable Supreme Court ruling.

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This potential decline in coverage gives rise to a particular worry of the hospital industry: a spike in medical care costs for which no payment is received from patients or their insurers.

The American Hospital Association said in a study earlier this month that uncompensated care costs hit an all-time high of $46.4 billion in 2013, the latest year for which the trade group had information on such expenses. These uncompensated care costs amounted to 5.9% of hospital expenses, according to the AHA.

The White House has said uncompensated care costs have since fallen by several billion dollars thanks to the expansion of benefits under the health law. Companies such as Tenet and HCA have also reported in recent quarters that unpaid medical bills are down, contributing to higher earnings since broader subsidized coverage has been available under the law in the last year.

Hospitals said in the brief that uncompensated care costs would jump above already unprecedented levels if the Supreme Court ruling goes against subsidies. And that would hit hospital company earnings hard, meaning investors in these stocks should be on high alert come June, when a decision from the Supreme Court is expected.

The article Hospitals Warn Of "Death Spiral" if SCOTUS Strips Obamacare Subsidies originally appeared on Fool.com.

Bruce Japsen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.