The U.S. Supreme Court (AP Photo/J. Scott Applewhite)

Analysts at Moody’s Investors Service have tried to figure out how the coming U.S. Supreme Court ruling on the constitutionality of the Patient Protection and Affordable Care Act of 2010 (PPACA) might affect health insurer finances.

The analysts ended up declining to make any firm predictions.

“The bottom line is that it is difficult to assess the impact to specific companies until we have a clearer view of the regulatory landscape after the Supreme Court announces its decision,” the analysts conclude.

Stephen Zaharuk and other analysts at Moody’s, New York, prepared a commentary on the implications of the Supreme Court decision in an effort to help investors understand what the decision might do to health insurers’ credit ratings.

Some of the best-known parts of PPACA call for the government to require health insurers to sell health coverage on a guaranteed-issue basis starting in 2014. Insurers would be able to consider applicants’ age when pricing coverage but not the applicants’ health status.

To keep those requirements from swamping health insurers with sick, expensive-to-insure insureds, Congress tried to compensate for antiselection problems by including a provision that would require most individuals to health coverage and most large and midsize employers to offer group coverage or else pay penalties.

The most visible critics of PPACA contend that the “individual coverage ownership” mandate is as unconstitutional as requiring all Americans to buy broccoli. The critics say PPACA must fall if the individual mandate falls, because the act contains no severability provision calling for the rest of the act to remain intact if one part is tossed out.

The Moody’s analysts have considered the three scenarios that many commentators say are the most likely outcome:

  • The court upholds all of PPACA.
  • The court finds the individual mandate to be unconstitutional and strikes most or all of the PPACA provisions that affect health insurers.
  • The court finds the individual mandate to be unconstitutional but severable from the rest of the law and upholds most or all other provisions of PPACA.

No matter what the court decides, ”we will likely have as many questions as answers,” the analysts say.

What really happens after the ruling comes out will depend on the outcome of the November elections, not just what the court says, the analysts say.

A Republican president could find many ways to delay and dilute implementation of PPACA, the analysts say.

But the analysts say they think either a ruling upholding all of PPACA or a ruling upholding all parts but the individual mandate could hurt insurers, because the cost of the new taxes, new coverage requirements and new limits on profitability that health insurers would face would far outweigh any benefits the insurers could get from enforcement of coverage mandates.

The penalties that would be imposed in connection with the individual and employer mandates are simply too weak to cause many individuals or employers to maintain health coverage, the analysts say.

Instead of flocking to buy coverage to avoid penalties, many individuals and employers likely will respond to rising coverage prices by paying the penalties and going without coverage, the analysts predict.

The analysts say PPACA already seems to have done some good for the U.S. health care system by, for example, encouraging insurers and health care providers to work together to try to hold down costs, the analysts say.

The analysts say the health insurers themselves by diversifying and making other changes that should help their performance no matter what happens to PPACA.

Health insurers seem to be doing a good job of handling the PPACA provisions that already have taken effect, such as a requirement that health insurers spend at least 85% of large group revenue and 80% of individual and small group revenue on health care and quality improvement efforts, the analysts say.

“To the extent that the sector continues to demonstrate an ability to work within the new environment and effect changes to the parts of the law that pose the largest threats, the negative impact will be somewhat mitigated,” the analysts say.

If the entire law is struck down, insurers would lose the new business and PPACA Medicaid expansion provisions, the analysts say.

In addition, many states are already well under way with implementing PPACA, and, if the federal PPACA goes away, “we may eventually see PPACA replaced by a number of state health reform laws that may be complicated and costly for insurers to deal with,” the analysts say.

California is an example of a state that seems likely to keep moving ahead with PPACA-style changes, the analysts say.

“For now, we believe insurers with greater product diversification, and more diverse strategies ,,, are best positioned for whatever decision is announced,” the analysts say.