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By Jeremy Glaser | 03-27-2012 03:00 PM

How Will Supreme Court's Ruling Affect Health-Care Stocks?

Regardless of when and how the justices rule on the Affordable Care Act as well as the best- and worst-case scenarios, company valuations should see little change, says Morningstar's Matt Coffina.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. As the Supreme Court hears oral arguments about the constitutionality of the Affordable Care Act, I'm joined today by Matt Coffina. He is a senior health-care analyst, and we'll take a look at what impact the Supreme Court's ruling could have on health-care companies and what investors should do?

Matt, thanks so much for joining me, today.

Matthew Coffina: Thanks for having me, Jeremy.

Glaser: So, let's talk a little bit about what the Supreme Court has decided. They are having a few days' worth of arguments here. We probably won't get decision until June. What are the Justices looking at? What are some of the really the key issues that they're focused on?

Coffina: So the Justices have a few things that they need to decide. The first question is whether or not they can even rule on the constitutionality of the Affordable Care Act. If people don't carry insurance under the individual mandate, then the taxes won't be collected until 2015. So there is something called the Anti-Injunction Act, which might mean that the court is unable to rule on the constitutionality of this provision until after the tax is collected.

The second issue they need to decide is really whether the individual mandate, which is a requirement that all Americans carry health insurance, is constitutional. They'll look at whether the mandate is permissible under the Commerce Clause of the constitution, whether Congress has that ability to require individuals to purchase health insurance. Assuming that they were to decide that the individual mandate is not constitutional, the next question would be whether or not the rest of the law can stand without that provision, or whether the entire law would have to be considered unconstitutional and therefore thrown out.

Then finally, sort of a side act to all of that would be the Medicaid expansion, where some of the states have argued that the expansion of Medicaid is overly coercive to the states, even though they have the ability to opt out of the Medicaid program entirely. Even though the federal government is going to be picking up the tab for most of the expansion and eligibility that will begin to take effect in 2014, some states have ruled that that was an overreach of congressional power, as well.

Glaser: So let's take a look at some scenario analysis here. I think it's probably difficult to read the tea leaves to see exactly what the Supreme Court is going to rule. But what are some of the possibilities? What do we think are some possible outcomes, and what impact are they going to have on some of the health-care firms? 

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