The U.S. Supreme Court upheld the individual mandate in a narrow ruling Thursday, clearing the main hurdle for health-care reform known as the Patient Protection and Affordable Care Act (PPACA). While it is possible that the battle over the fate of the health-care law will now shift to the legislature, given the low probability of Republicans gaining a filibuster-proof majority in the Senate, we now believe the PPACA isn't likely to be repealed. We've incorporated the anticipated effects of the PPACA in all of our projections, and as a result, the effect of the ruling on our valuations and recommendations across the health-care sector is immaterial.
For the managed-care sector, the ruling is largely a positive, as alternatives were a lot more punitive, particularly for firms operating in the individual marketplace. We factor into our models the more than 30 million individuals that are expected to gain insurance coverage as a result of the law through a combination of expansions to the Medicaid program (although the Court's ruling on this issue may limit the magnitude of this expansion) as well as new subsidies that can be used to buy insurance in the state-based exchanges. Medicaid MCOs like Amerigroup (AGP) are best positioned to benefit from broader Medicaid eligibility, adding to the already robust growth story from increased outsourcing of Medicaid. We expect most commercial insurers to compete for new individual members in the exchanges, but those with a strong historical position in the individual market and well-known brands, such as WellPoint (WLP), seem particularly well positioned. On the other hand, MCOs will continue to face margin pressure from regulatory scrutiny of premium increases, minimum medical cost ratios, and cuts to Medicare Advantage reimbursements. However, we expected most of these headwinds to remain in place even without the PPACA, and we have incorporated deteriorating margins in our valuations.