Last week, the US Supreme Court heard the challenge to the Patient Protection and Affordable Care Act (PPACA), a key piece of President Obama’s legislative agenda. The plaintiffs include attorneys general from 26 states as well as the National Federation of Independent Business.

The legislation has been a lightning rod for criticism since the president signed it into law in 2010. Opponents of the law have focused largely on its individual mandate, which requires almost every American to carry health insurance by 2014. Congressional Democrats believe the powers granted to Congress under the Commerce Clause of the US Constitution gave them the authority to create such a mandate, while Republicans and conservative organizations believe the government has overstepped its bounds.

Given the scope of the challenges facing the PPACA and the contentiousness of the issues, the Supreme Court devoted an almost unprecedented six hours to oral arguments for the case over the course of three days. The last time the court spent that much time on a single case was when it was hearing challenges to civil rights laws in the 1960s. So there’s no doubt the court rightfully considers this a landmark case. And the outcome has important consequences for both consumers and investors.

Although liberals and conservatives differ sharply over health care policy, both sides seem to agree that the US health care system is in need of reform.

According to data from the Organization for Economic Cooperation and Development (OECD), the US spends slightly more than 2.5 times the average OECD nation on health care, and that spending amounts to roughly 17.4 percent of our gross domestic product (GDP). Despite all that spending, health care outcomes are mixed. While the US achieves better-than-average outcomes in treating cancer, it lags other nations in primary preventive care, with much higher hospital admission rates for common conditions such as asthma.

While the US health care system earns a high ranking relative to other nations for its technical resources–the US is ranked second in the OECD in terms of the ratio of MRI units to population (25.9 per million versus the average 12.2 per million) and CT scanners to population (34.2 per million versus the average 22.8 per million)–it’s suffering a critical shortage of doctors. Indeed, the US is only ranked 26th among OECD nations in terms of the number of physicians. While the US has 2.4 physicians per 1,000 people, the average OECD nation has 3.1 physicians per 1,000 people.

And with most physicians opting to become specialists, an unusually low percentage of US doctors are actually primary care physicians. Although the US health care system excels at treating acute diseases such as cancer, it’s less focused on prevention or treating common chronic diseases. Because most illnesses are acute by the time we get around to treating them, that pushes the cost of care higher.

There are a number of other reasons behind those disturbing statistics. Our medical malpractice laws are one obvious factor in higher costs. Because it’s relatively easy to sue a physician over an unfavorable outcome–even when the possibility of those outcomes were clearly disclosed to patients–doctors attempt to mitigate potential liability by routinely conducting expensive diagnostic tests.

Additionally, most doctors graduate from medical school with an enormous debt burden, so it makes economic sense for them to focus on more lucrative specialties such as neurology or cardiology, rather than take care of asthma and runny noses. As of 2010, for example, the average medical school graduate had more than $150,000 in educational debt.

Finally, the portion of the US population that is uninsured or underinsured drives up the cost of care for everyone else. More than 16 percent of the US population–about 51 million people–don’t carry health insurance. Given the cost of health care for even the insured, the uninsured often wait until their situation is acute before they seek care. That results in a higher bill that is also less likely to be paid.

While our government should work toward the noble goal of broadening access to health care, I don’t think the current approach will ultimately reduce costs or improve the quality of care. Instead, it will primarily be a boon for the health care sector–particularly the insurance and managed-care outfits–and the market seems to agree with that assessment.

When the PPACA’s individual mandate takes effect in 2014, it will push about 32 million more people into the ranks of the insured. While there are some overt cost-control measures built into the law, the main argument for lower health care costs is that they will be spread across a larger base. But the more likely reality is that the same high costs will simply be imposed on more patients, even though more patients will be paying insurance premiums. That will translate into greater profits for the health care industry and the market understands that.

So even as the more conservative Justices of the Supreme Court seemed skeptical of the government’s authority to impose an individual mandate, the health care sector continued to head higher.

The chart below shows the performance of the Health Care Select Sector SPDR (NYSE: XLV) over the month of March. The left axis shows volume traded, while the right axis shows the share price. The exchange-traded fund (ETF) tracks a broad basket of health care stocks, and it gained 2.5 percent last week on higher-than-average volume.

Source: Bloomberg

The next chart shows the same data for iShares Dow Jones US Healthcare Provider Index (NYSE: IHF). It rose 4.5 percent on greater-than-average volume.

Regardless of whether you agree with the PPACA, the market seems to think the law will ultimately be affirmed by the highest court in the land. So at this point, I wouldn’t bet against the health care sector even if the law doesn’t actually achieve its intended aims. As investors, we should put politics aside and simply follow the money.

What’s New

No new funds of note launched last week.

Portfolio Roundup

There was no portfolio-specific news last week.