SCOTUS Uncertainty Deters Innovation

What's the price of regulatory uncertainty? Nobody knows for sure. But it's high. As leaders in the healthcare industry wait and wonder what the Supreme Court is going to decide about the Affordable Care Act, a casualty of the uncertainty is innovation.

Despite the acrimonious nature of attempts to fix the fact that healthcare costs too much, is unevenly distributed, and hurts too many people, disagreement on how to make repairs stems from the how, not the why. Let me explain.

Very few people, even those in the industry itself, will dispute that healthcare doesn't provide the value it should, and that people and organizations pay way too much for it. It needs to be fixed. But because healthcare is already so highly regulated and dependent on government reimbursement and regulatory decisions, the endless tug-of-war over the how prevents much of the work on the why.

It's tough to get traction when the fixes never get the chance to be fully implemented because the fight over policy is never really over. Especially this time, where despite the passage of a labyrinthine omnibus law—which I'm convinced nobody has read in its entirety—we still don't have a resolution, because the Supreme Court decided to weigh in on the constitutionality of key parts of the law.

Many people, including (and especially) our news staff, wait with baited breath on the decision, which could happen at any time (my guess is a Friday afternoon, when the least media firestorm could be expected, sometime in the next two weeks). Don't expect that move to decrease the uncertainty—and the risk—of operating a healthcare entity.

In fact, Moody's just released a report (registration required) that no matter what the Court decides, nonprofit hospitals and health systems will be worse off. How encouraging. Heck, even if the justices leave the law alone, Moody's says the effect will be a long-term negative for nonprofits, as they predict annual Medicare reductions will "outweigh the benefits of lower uncompensated care."

The report goes on to outline three possible scenarios should the Court decide to invalidate certain parts of the law—all of them negative for nonprofit health systems. For what it's worth, here's what Moody's says about the three most likely decisions:

SCENARIO 1: The Court rules the law is constitutional. This is what Moody's calls a "credit-neutral event" because nonprofit hospitals have been preparing to operate within the law since April 2010.  But analysts add that the healthcare reform law is a long-term, credit-negative event because it mandates annual Medicare reimbursement reductions to hospitals, which outweigh the benefits of lower rates of uncompensated care.

SCENARIO 2: The Court strikes down the individual mandate, but upholds the rest of the Act. The individual mandate is the most credit-positive feature of the law for nonprofit hospitals, according to Moody's.  The result of the mandate's removal means the number of uninsured Americans will remain high and result in continued growth in uncompensated care, while Medicare reimbursement rate increases would slow.

SCENARIO 3: The Court rules the entire law unconstitutional. The resulting absence of legislative and regulatory framework for diminishing unsustainable Medicare spending creates new uncertainty.

I can't disagree with any of that, but even outside of the nonprofit sector, which Moody's monitors closely because it rates the creditworthiness of such institutions for bond buyers, uncertainty creates a vacuum for innovation.

Generally, consolidation in the healthcare industry continues apace, but that doesn't represent innovation. Rather, in many cases it represents defensive posturing and vertical integration strategies to better insulate against threats to revenue and margin. These not only rise from the law, but from nimble competitors in the private market that seek to carve out their niche of profitability in the rapidly shifting healthcare playing field.

One could argue that the decision will remove a lot of uncertainty in the market, but that's true only if you don't already have anything invested in meeting any of the possible outcomes. Most hospitals and health systems have invested heavily in gearing up for the changes, some of which have already been implemented. What's the cost of recalibrating expectations, the cost of waiting for another Congress to take up and address what the Supreme Court deactivates?

It's high, and it doesn't do anything to address the affordability or safety of healthcare.