An Investor Guide to the Supreme Court Obamacare Ruling

Investors impatiently waiting for the U.S. Supreme Court Obamacare ruling have just hours to go.

The Court is supposed to announce its decision on the Patient Protection and Affordable Care Act, or Obamacare, tomorrow (Thursday).

No matter what the ruling, there will be an immediate pronounced reaction in the markets.

This can already be seen with the movement in insurance company stocks as traders prepare for the Supreme Court action.

After rising 17.2% for 2012, UnitedHealth Group (NYSE: UNH) has fallen 5.8% in market action over the last month. Up 5.2% for 2012, WellPoint Inc. (NYSE: WLP) is down 1.7% for the past five days.

The Supreme Court will likely act in one of four ways for the sweeping healthcare overhaul that was signed into law on March 23, 2010. Let's look at how each of the four Obamacare ruling outcomes could affect the markets.

The Supreme Court Obamacare Ruling: Four Outcomes

Obamacare Ruling #1: The least disruptive ruling by the Supreme Court would be to simply let the law remain intact, as most of the lower courts have ordered.

Even that will trigger a ripple effect in the markets.

After the initial market reaction, the dust will settle and stocks that have slipped this week will end up in the green. The biggest change will be for insurance company stocks such as UnitedHealth Group, WellPoint and Cigna Corp. (NYSE: CI), which will most likely rebound.

Obamacare Ruling #2: The second option, slightly more aggressive in terms of market turmoil, would be for the Supreme Court to strike down the mandate that all individuals have to buy health insurance or pay a penalty, and let the rest of Obamacare exist.There would be a wave effect in the markets as insurance stocks continue to fall.

If the insurance mandate is struck down, but the rest of Obamacare upheld, that is a bad, bad moon on the rise for firms selling health insurance policies.

Insurance companies supported Obamacare due to the mandate requiring almost everyone to buy a policy or be penalized. Where insurance companies in every sector, not just healthcare, make their money is from investing income, not premium payments. Profits from premiums for a health insurance company are low, in the 2% range.

Investing the premium income for profits is how insurance companies prosper.With the premium payments, securities, real estate and other assets are bought.

Hopefully, for the owners and employees of insurance companies, investment returns are greater than what must eventually be paid out in claims. This is the basic "time value of money" factor inherent in all investing, where profits can be maximized.

When someone like Warren Buffett is doing the investing for the insurance companies such as Geico and General Re Corporation in the portfolio of Berkshire Hathaway (NYSE: BRK.A, BRK.B), that can be very lucrative.

Obamacare Ruling #3: If the mandate is struck down and the rest of Obamacare retained, then insurance companies will lose new customers and be forced to raise premiums due to the costly provisions of the law. Those provisions include not being able to deny coverage based on pre-existing conditions, not being able to charge more based on a person's medical history, no lifetime caps and other features.

As an example, Obamacare forces insurance companies to pay for expensive procedures, such as colonoscopies and physicals, under the patient screening provision. These were not covered before in many health insurance policies.

The premium income that would be gained if everyone was forced to carry health insurance has not been accounted for yet since Obamacare has not been fully implemented. That means insurance companies wouldn't take an earnings hit, and insurance stocks will likely rebound.

Obamacare Ruling #4: The most radical decision by the Supreme Court would be to declare all of Obamacare unconstitutional and send Congress back to square one for legislating healthcare reform.

If all of Obamacare is repealed by the Supreme Court, there will be a major market impact, not just on the financial markets, but on the global geopolitical situation.

The loss of credibility would cripple President Obama and force him into the position of being a veritable "lame duck" president.

No matter which of the four ways the Supreme Court comes down, investors should prepare for volatile markets.

As legendary investor George Soros has commented, in the short term, the financial markets are "chaotic." The Supreme Court Obamacare ruling will make that even more so.

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