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Morningstar | ACA Ruled Unconstitutional by District Court, but We See No Near-Term Impact to Fundamentals

On Dec. 14, Judge Reed O'Connor of the Northern District of Texas issued a ruling effectively declaring the Patient Protection and Affordable Care Act, or ACA, unconstitutional. For now, we're assuming little will change for the companies we cover in the healthcare sector over the near term as the ruling will likely make its way through the appeals process. We wouldn't be surprised to see this case as the third appearance the ACA will make in front of the U.S. Supreme Court, but the potential timeline for a final decision remains unclear.

The basis for the decision finds its roots in Congress' elimination of the shared-responsibility financial penalty that accompanied the passage of the Tax Cuts and Jobs Act late last year. In short, Judge O'Connor found the individual mandate to be an essential and inseverable provision of the ACA, and Congress' decision to eliminate the enforcement of tax penalties under the law rendered the entirety of the legislation unconstitutional. This logic follows from the 2012 U.S. Supreme Court decision that upheld the ACA as constitutional under Congress' powers of taxation.

In our view, the healthcare provider sector is most at-risk stemming from any changes to prevailing healthcare legislation. Whether it be changes to individual coverage or a roll-back of Medicaid expansion, a higher uninsured rate unequivocally equates to pressure on hospital margins. From a payer perspective the trade-off is a little less clear, although Medicaid-focused insurers are likely to feel the bulk of any enrollment losses.

We don't intend to make any changes to moat ratings or fair value estimates as a result of this decision. We'll continue to monitor the case as it makes its way through appellate court in the coming months, but the outcome and timeline is too uncertain to make any meaningful changes to our assumptions in these early days. Additionally, wildcards such as potential legislative action further muddies our analysis.

Ultimately, while the financial penalty for not carrying insurance coverage is set to end Jan. 1, 2019, our understanding is that the federal government intends to maintain the status quo through the appeals process. Further, insurers have already locked in rate proposals for 2019 so the earliest we'll likely see potential effects of the ruling will be for premiums and policy offerings slated for the 2020 open enrollment season.