What Should the Supreme Court Do With Obamacare?

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The day of reckoning for the Affordable Health Care Act is nearly upon us. The last day of the Supreme Court's 2011-2012 session is tomorrow, which means we should get a ruling on the constitutionality of the law -- and the rest of the remaining laws that few care about -- tomorrow.

There's a small possibility that the Justices will punt, arguing that the insurance mandate hasn't kicked in yet, so the Supreme Court can't rule on its constitutionality yet.  As far as I can tell, pushing the decision back is unlikely, but everyone should be prepared for the possibility of a less than satisfying answer that's likely to blanket the health-care sector in uncertainty.

I'm not a lawyer, nor do I play one on the Internet, so rather than try to predict what the Supreme Court will do, I'll give you my opinion of what it should do -- and point out how that could help and hurt various companies.


First, the problem
As its name implies, the main purpose of the Affordable Health Care Act was to decrease the cost of health insurance.

Contrary to popular belief, health-insurance companies such as UnitedHealth Group (NYS: UNH) and Aetna usually don't make more when the cost of insurance increases. In general, the companies are just passing along health-care costs and taking their standard markup for administering the plan and taking on the risk. Essentially, insurers just estimate the medical cost for all the members in a plan, add their markup, and then divide by the number of members to get the final cost.

The way to decease the cost, then, is to get healthier people into the pool. They'll require fewer medical expenses, so when it's averaged out, the cost per person goes down. Insurance companies do that now when they sign up companies and require all employees to be covered. The recent college grad who works out three times a week is subsidizing the less healthy in the office.

You could also remove the sickest people who require the highest costs, which would decrease the cost for everyone else. Insurers do that now, keeping costs of individual plans down by not allowing patients with pre-existing conditions to enroll in the plan.

But the object of the Affordable Health Care Act was also to increase coverage, which will work only if both groups -- the healthier who don't really need the coverage and those with pre-existing conditions -- are put in the same insurance pool.

If the definition of "unconstitutional" is "unfair," then I have to think the insurance mandate will be struck down. Clearly, the insurance mandate requires people to spend money on something that some people don't necessarily need. If the risk of getting sick is low enough, self-insuring makes financial sense.

Of course, we ask citizens to pay taxes that cover a wide range of services that they don't necessarily use. People who don't read still fund the library. And people without cars fund road repairs. Sometimes things have to be done for the good of society.

Also keep in mind that society ends up paying for those who choose not to pay for health insurance and get sick. Hospitals don't turn away patients even if they can't pay. To keep from going out of business, the hospital indirectly passes those costs on to those who are insured.

Repercussions
I think the Supreme Court should leave the law alone. I'll be the first to admit that it isn't perfect, but it's a step in the right direction. Sticking with the status quo will hurt some industries, especially medical-device makers such as Medtronic (NYS: MDT) and Boston Scientific (NYS: BSX) , which were hit with a hefty tax to help pay for coverage.

The worst thing the Supreme Court could do is throw out the insurance mandate without throwing out other parts of the law, especially the coverage for pre-existing conditions. Without the pool of healthy people, those with pre-existing conditions would drive up the cost of health care.

Of course, Congress has the capacity to remove the pre-existing-condition clause even if the Supreme Court doesn't, which I imagine the legislators would do -- after they finish running for re-election, of course.

Other options
If the whole law is struck down, Congress will need to figure out a better solution. We certainly can't continue to have costs spiraling out of control. I don't expect drugmakers such as Pfizer (NYS: PFE) and Merck (NYS: MRK) to stop their continued increase in the cost of medications, especially as drugs go off patent.

One possibility would be to passively increase the use of health insurance by requiring that insurers cover pre-existing conditions, but only for those who keep their health insurance active. In addition to increasing the pool of healthy people paying now so they'll have insurance later, the strategy would make health insurance more portable, which might increase competition, although I don't know by how much. Without a mandate, though, some people will continue to use society's backstop of paying for the uninsured as their "insurance."

What now?
Get some sleep. The Fool will have full coverage of the decision and how it will affect various companies tomorrow.

While you're waiting, check out the Fool's new free report that outlines the three Dow stocks with the X factor that makes them stand out from their illustrious Dow peers. Get the report.

The article What Should the Supreme Court Do With Obamacare? originally appeared on Fool.com.

Fool contributorBrian Orelliholds no position in any company mentioned. Check out hisholdings and a short bio. The Motley Fool owns shares of Medtronic.Motley Fool newsletter serviceshave recommended buying shares of Pfizer and UnitedHealth Group and have recommended creating a diagonal call position in UnitedHealth Group. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.

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