Insurers at Risk in Challenge to Health Law’s Medicaid Plan

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Demonstrators protest against cuts to federal safety net programs, including Social Security, Medicare, and Medicaid on Nov. 7, 2011 in Chicago. Close

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Photographer: Scott Olson/Getty Images

Demonstrators protest against cuts to federal safety net programs, including Social Security, Medicare, and Medicaid on Nov. 7, 2011 in Chicago.

A Supreme Court decision striking down the U.S. health-care law’s expansion of Medicaid might expose environmental and educational laws to legal challenges while hurting stocks that surged anticipating more than $600 billion in new spending over the next decade.

In the case against President Barack Obama’s health-system overhaul, to be heard by justices March 26-28, 26 states argue the plan to cover 17 million uninsured Americans by expanding the care program for the poor is unconstitutional -- even though the federal government would pick up most of the tab.

The challenge to the program’s expansion has received less attention than the dispute over the requirement that all Americans carry health insurance or face tax penalties. While a lower court upheld the Medicaid plan even as it struck down the individual mandate, reversal might change the program for good and also expose laws such as the Clean Air Act to the No Child Left Behind education law to judicial challenge.

“If they buy the more fundamental claim by states that this is coercive, not only would that cast doubt on the constitutionality of Medicaid as we know it, it would also cast doubt on a huge number of other spending programs,” said I. Glenn Cohen, an assistant professor at Harvard Law School who wrote about the case in the New England Journal of Medicine.

Managed-Care Companies

Managed-care companies with large Medicaid businesses, such as Centene Corp. (CNC) of St. Louis, Missouri, have seen their stock prices more than double since March 2010 on the expectation that states with rising caseloads will turn to them to help control program spending. An adverse decision might affect those gains while also hurting hospitals, nursing homes and other health providers.

The decision by the Supreme Court to review the constitutionality of the Medicaid expansion came as a surprise, said Elizabeth Wydra, chief counsel for the Washington-based Constitutional Accountability Center, who represents state lawmakers supporting the health-care law. It was upheld by the 11th Circuit Court of Appeals.

“The Medicaid expansion issue is the real sleeper issue of the health-care challenge,” Wydra said in a telephone interview. “The states’ arguments have the potential to open Pandora’s Box. While they only want to limit their argument here to Medicaid expansion in the Affordable Care Act, I think the consequences of their argument are much more extreme than that.”

$627 Billion

The Congressional Budget Office projects that the expansion of Medicaid set to take effect in 2014 will lead to $627 billion in new federal spending over the next 10 years.

“It is significantly more revenue than is currently in the system right now,” said Matt Barry, health-care analyst team leader for Bloomberg Government and author of a new study that looks at the impact on businesses in states pressing the court challenge if the Medicaid expansion is halted. “If the Affordable Care Act is struck down, which includes the Medicaid expansion, then there is going to be a lost business opportunity for managed care companies, hospitals, nursing homes and other providers.”

More than $207 billion in new federal spending from 2014-2018, slightly more than half of the total nationwide, will go to states that have challenged the health-care law, the BGOV study found. Five of the states -- Texas, Florida, Pennsylvania, Ohio and Georgia --account for more than half of that spending.

Most to Gain

Managed-care providers have the most to gain in the expansion -- and to lose if the Supreme Court stops it. In the litigant states, those health insurers are expected to gain $46 billion in the first five years of the expansion. Investments that have occurred in preparation for the new law, such as Molina Healthcare (MOH) Inc.’s $135 million acquisition of Unisys Corporation (UIS)’s health information management business in 2010, may no longer make financial sense if it is struck down, according to the BGOV study.

Since March 1, 2010, shares of Centene have surged 146 percent; Wellcare Health Plans inc. of Tampa, Florida, jumped 145 percent; Amerigroup Corp. (AGP) of Virginia Beach, Virginia, increased 134 percent; and Molina Healthcare of Long Beach, California, rose 122 percent.

“They are the most vulnerable,” Paul Heldman, senior health policy analyst for Potomac Research Group in Washington, said in a telephone interview. If the Supreme Court halted the new spending, “it would be a big surprise to Wall Street.”

Health Providers

Hospitals, nursing homes and other providers also are expected to be helped by the Medicaid expansion. Depending on how the court rules, a decision against the expansion could be a double-whammy if reductions in Medicaid and Medicare payments and other cuts that are part of the law are left intact, Heldman said.

The federal government says states’ participation in Medicaid is voluntary -- if they don’t like the requirements to expand coverage they can opt out of Medicaid altogether. The states argue that the federal government is “making states an offer they could not refuse” and that dropping out of the program that is in place in all 50 states and losing federal funding they now get is not practical. They are being coerced to accede to onerous new federal demands that will lead to significant outlays of state cash, they say.

The U.S. would pay the full cost of the Medicaid expansion in the first two years, a share that would decline gradually to 90 percent in 2020 and thereafter. Still, Florida, which is leading the states’ challenge to the law, estimates its share of Medicaid spending will increase by $1 billion annually by the end of the decade. Other states, such as New Hampshire, have said they will save money under the new law.

‘Fiscally Unreasonable’

Doug Holtz-Eakin, president of the American Action Forum and former director of the CBO, thinks the federal government’s demands on the states are “fiscally unreasonable” but he doesn’t believe justices will strike down the Medicaid expansion -- even though he has joined other economists in urging them to do so.

If they did, the ruling “would be very important and would change dramatically the federal-state relationships,” he said.

At the least, a ruling against the Affordable Care Act might leave Medicaid as it exists today. It could also provide the political push to do what Holtz-Eakin and many Republicans have called for: significant changes to health-care funding that give states more flexibility and contain costs.

“This is an enormous fiscal and regulatory initiative and has enormous implications for all the participants in the health care sectors,” Holtz-Eakin said. “Which way the winds blow on this matters a lot.”

To contact the reporter on this story: Amanda J. Crawford in Phoenix at acrawford24@bloomberg.

To contact the editor responsible for this story: Jeffrey Taylor at jtaylor48@bloomberg.net

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