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May 13, 2016 at 09:30 AM
(Bloomberg) — Hospital and insurer stocks dropped after a federal judge in Washington ruled that the process the U.S. Department of Health and Human Services (HHS) has been using to make billions of dollars in Patient Protection and Affordable Care Act (PPACA) cost-sharing reduction payments to insurers is unconstitutional, potentially jeopardizing a source of their revenue.
See also: Court ruling threatens $5 billion in PPACA insurer subsidy payments
Community Health Systems (NYSE:CYH) fell 11 percent to $12.56 at the New York close. Tenet Healthcare Corp. (NYSE:THC) dropped 9.8 percent to $28.41 and HCA Holdings (NYSE:HCA), the biggest U.S. for-profit hospital chain, was down 3.2 percent to $77.69. Shares of health insurers, including Anthem (NYSE:ANTM) and Aetna (NYSE:AET), also declined.
See also: Hospital chains can’t move home-state Republicans on PPACA
Judge Rosemary Collyer of the U.S. District Court for the District of Columbia ruled Thursday that the Obama administration doesn’t have the power to make cost-sharing reduction program payments without a congressional appropriation. The court stayed its ruling pending an appeal by the administration.
The cost-sharing reduction program helps PPACA public exchange plan buyers with income under 250 percent of the federal poverty level pay deductibles, co-payments and coinsurance amounts.
Hospitals could be directly affected by the ruling. Government subsidies have helped patients afford coverage for expensive hospital stays and procedures, contributing to the bottom line at hospital companies. Ending those subsidies might discourage patients from signing up for insurance and exacerbate problems with unpaid bills that already plague hospitals.
Cost-sharing subsidies
Without the cost-sharing payment reductions, insurers also may find it difficult to offer plans under PPACA, which has requirements for cost and coverage at a variety of levels. Collyer noted in her ruling that under PPACA, insurers’ obligation to reduce cost-sharing doesn’t depend on whether they receive government reimbursement.
About 71 percent of plans bought through the PPACA marketplaces, called exchanges, were so-called “silver plans” that provide subsidies to some low-income members, said Chris Rigg, an analyst at Susquehanna Financial Group, in a note to clients.
