Supreme Court, courtesy AP

Any Supreme Court decision on major elements of healthcare reform will have major credit implications for U.S. health insurers, said Moody’s, with two of three scenarios being credit negatives for the industry, according to the ratings agency.

If the High Court rules that the individual mandate is unconstitutional, but holds that the provision is severable from the rest of the Patient Protection and Affordable Care Act (PPACA,) this action would create the  most negative credit impact on health insurers of any likely scenario, Moody’s warned.

This would occur under a scenario where the individual mandate is struck down while the rest of the ACA would remain intact.

The Act, “without an individual mandate but with a requirement to insure any applicant would undermine the insurance concept by allowing individuals to purchase insurance only when they were sick,” Moody’s said.

Health insurance trade lobbies have argued against this scenario in amicus briefs to the court. To make up for the larger and higher risk pool, insurers would be forced to increase premiums, potentially making individual healthcare insurance unaffordable for most of the general public, Moody’s and others have noted. Members from both parties of Congress have acknowledged that without the mandate, the ACA is unworkable.

In addition, if the Supreme Court does indeed uphold the individual mandate with the rest of the healthcare reform law  intact, ratings would also be negatively impacted, Moody’s warned. The more onerous provisions of the act are set to begin in 2014, and will “present greater challenges and squeeze margins,” Moody’s stated. These provisions include the implementation of public healthcare exchanges, increased pricing regulation, and additional premium taxes.

The credit positive would happen under a basic nulling of the PPACA. If the Supreme Court rules that the individual mandate is unconstitutional along with either a portion or all of the ACA — including all the regulations and limitations imposed on the sector — this would be seen as a positive development for health insurers’ ratings, the agency said. This would mean regulations already in force could also be repealed, including the controversial minimum medical loss ratio (MLR) requirements and reductions in the reimbursements paid to insurers for Medicare Advantage plans.

It is unlikely that the court would invalidate the entire law, Moody’s says. The court could instead strike down some of the provisions deemed burdensome to insurers, such as the guaranteed issue and community rating provisions.

The Supreme Court announced a week ago announced that it would review the constitutionality of the individual mandate provision and the severability of this provision. 

The High Court could holds that it lacks jurisdiction to hear cases regarding the individual mandate until it goes into effect in 2014, throwing more uncertainty into the equation, but the court did seem to expedite the hearing and will devote much time to arguments.

For Moody’s, there is already uncertainty enough. If the court strikes down the mandate, and there is a partisan stalemate on how to proceed, if at all, in rewriting the law, the solution would most likely be deferred until the after the 2012 elections, where, if no mandate emerges, the issue “could drag out, leaving healthcare insurers in limbo with respect to their participation in the exchanges and the potential impact on their business in the employer market,” Moody’s stated.