For big insurers, a legal blow to federal subsidies may be glancing

Publicly traded insurers may not feel too much financial pain in the short term if the U.S. Supreme Court strikes down Obamacare premium subsidies offered through the federal exchange and Congress doesn't act to restore the financial assistance, analysts say.

But a ruling against the subsidies likely would hammer the business plans of Blue Cross and Blue Shield plans, as well as not-for-profit co-op plans that were created by the ACA to increase competition in the insurance market. The Blues, in particular, captured large market shares in many states with federally run exchanges.

The reason publicly traded insurers wouldn't be overly affected by a ruling striking down the subsidies is that the individual-market exchange business represents a small portion of their overall profitability, according to Wall Street. In addition, the plans that insurers are offering in state-run exchanges in states such as California and New York would be unaffected by the ruling.

Despite the potentially large decline in the number of insurance customers in states using the federal exchange, that scenario may have a more muted effect on the bottom lines of insurers trading on Wall Street. “The impact may not be as material as you think at first, but it's not necessarily a positive by any measure,” said Vishnu Lekraj, an analyst at Morningstar.

Some investor-owned insurance companies are more dependent than others on the federal exchange. Aetna, Centene, Cigna and Humana do almost all of their exchange business in states using HealthCare.gov, which could make the Supreme Court's decision more consequential for them. Anthem, Health Net and Molina are predominantly in state-based exchanges. UnitedHealth will mostly be split next year between the state and federal exchanges.

Ana Gupte, a managing director at Leerink Partners who follows insurers, also said the loss of the tax credits would not have a major financial effect on publicly traded insurers. She said exchange plans are contributing less than 1.5% toward earnings-per-share growth this year for each of the big public companies participating in the exchanges—Aetna, Anthem (formerly WellPoint), Cigna Corp., Centene Corp., Health Net, Humana, Molina Healthcare and UnitedHealth Group.

By next June, the U.S. Supreme Court either will invalidate or uphold premium tax credits in the King v. Burwell case.

One section of the Patient Protection and Affordable Care Act says the subsidies are available “through an exchange established by the state.” ACA opponents in the King case argue that tax credits cannot be issued to people who live in at least 34 states (the status of three more states is unclear) that have not set up their own exchange and use the federal exchange, while the Obama administration argues that the law as a whole authorizes subsidies in all the states.

If the Supreme Court rules that the law only allows tax credits through state-run exchanges, millions of Americans now receiving the subsidies probably would drop their coverage because they would find it unaffordable—a scenario that could disrupt the new individual market and drive up premiums as healthier people exited the pool and sicker people stayed in.

Cigna and Humana have lost money on their exchange plans so far this year, though they expect to break even in 2015. Many analysts have predicted sustainable profit margins won't occur until 2016 at the earliest.

But investor-owned insurers still have major investments in the exchanges, Wall Street observers agree. The big eight are expected to collect $7.6 billion in revenue from enrollees on federally run exchanges in 2015, according to Gupte's latest research.

On the other hand, the disappearance of federal subsidies likely would damage the finances of for-profit hospital companies, whose share of uncompensated care would rise. HCA, Tenet Healthcare Corp., Community Health Systems and other for-profit hospital chains operate many facilities in states whose Republican leaders have strongly resisted establishing their own exchange or expanding Medicaid to lower-income adults. HCA, for example, has 78% of its acute-care beds in states that haven't cooperated with the law, according to analysts at J.P. Morgan Securities.

Josh Weisbrod, a partner at Bain & Co., said there are two schools of thought among health insurers if the subsidies are thrown out. The first is they simply move forward and lose many paying customers along the way—a scenario some payers are planning for. But “there may not be all that much they can do” until the Supreme Court rules, he said.

The second school of thought is that the Obama administration, perhaps with congressional support, will find some stopgap measure to prevent Americans from immediately losing their tax credits and coverage. “Washington will not want those members who are getting subsidies today knocking on their doors wondering where their subsidies went because of a Supreme Court ruling,” Weisbrod said.

Although a loss of tax credits would not greatly shake health insurers' finances, analysts mostly agreed on what would happen to the general health insurance environment. “It would be haywire if the court invalidates federal subsidies,” said Steve Halper, a managed-care analyst at FBR Capital Markets & Co.

Follow Bob Herman on Twitter: @MHbherman