WASHINGTON - When the Supreme Court upheld the core components of the Affordable Care Act, the impact on UnitedHealth Group and other health insurers was supposed to be minimal.
For some reason, Wall Street never got the message.
Since the decision upholding universal health care, stocks in most sectors have rallied heartily, collectively adding $470 billion in equity value and sparking the year's best three-day rise in the Standard & Poor's 500 index.
But stock prices have dropped for all of the country's major health insurers, a surprising twist given that the health care law is expected to deliver millions of new customers to these companies. None of the market losses has been more puzzling than those suffered by Minnetonka-based UnitedHealth, the country's largest insurer by sales volume and a stock that many analysts have predicted will sell in the $70-a-share range.
UnitedHealth appeared to rebound from a low of $56.55 a share on June 28, just after the Supreme Court upheld the health care act. The share price rose to $60.55 just after the stock market opened June 29.
From there, it has been mostly downhill. The stock closed Friday at $55.82. Not even news of a $20 billion government contract could stop the hemorrhaging of UNH's market cap.
"The law was the law before the decision and after the decision," said Sheryl Skolnick, the director of research at CRT Capital Group. "I think it was wrong for the [UNH] stock to go down."
UnitedHealth declined to make anyone available to discuss the trend or how the law will affect its fortunes in the future. "We don't comment on our share price," spokesman Matt Stearns said.
Beginning in 2014, the Affordable Care Act will require insurance companies to cover pre-existing conditions, offer policies to anyone who asks, and set premiums for communities instead of individuals. Additional costs from those changes should be recovered in a new market of millions of healthy customers who will be required to buy health policies or pay a penalty -- the so-called "individual mandate."
Analysts say the market reacted to an unexpected court decision, not a negative economic outcome for UnitedHealth or other carriers.
"Most people had expected the court to overturn the mandate. When the court upheld the mandate, there was uncertainty. The market wants certainty," said Ana Gupte, an analyst with Sanford C. Bernstein & Co. "People want to be able to predict earnings and cash flow."
Capital Group's Skolnick, who follows UnitedHealth closely, said the shock of the decision to uphold the mandate and the court's unanticipated decision to let states choose whether to participate in the law's Medicaid expansion led investors to become more skittish than circumstances actually warrant.
"The market," said Skolnick, "overdoes itself."
Year to date, UNH's share price is up roughly 10 percent. For the same period, its major competitors shares are collectively down 7 percent.
If certainty is what the market seeks, Skolnick explained, it can count on the Supreme Court decision to make it difficult to completely repeal the major elements of the health care law. To dismantle the law, Republicans must win the White House, retain their majority in the House of Representatives and win a supermajority of 60 seats in the Senate. Odds of all three things happening are slim, Skolnick said.
Meanwhile, investors' concerns that new health insurance exchanges will cut profit margins for insurance companies don't take into account the 15 million to 20 million new customers the health insurance industry could gain as a result of reform, she said.
Another major misconception surrounds the idea of guaranteeing an insurance policy to anyone who asks, regardless of age or physical condition. While insurance companies, including UNH, must offer policies, they still have the right to set premiums based on the collective age and health of the community of customers they serve. In other words, the reform law allows insurance companies to keep premiums high enough in high-risk pools to make a profit.
"That's the piece the market is missing," Skolnick said.
The market also may not have considered the practical reality of the court's state's rights decision on Medicaid, experts say. The reform law makes the federal government pay 100 percent of the cost of expanding Medicaid until 2016, then scales the federal share back to 90 percent by 2020. The states' share of the expansion will never be more than 10 percent.
Medicaid expansion will provide alternatives for poor people who now use emergency rooms and run up unpaid charges that get passed on to insurance companies and their customers in the form of higher health insurance premiums, said Larry Levitt, co-executive director of the Kaiser Initiative on Health Reform.
Pressure will be immense from hospitals who want Medicaid expansion to help pay for medical care they are legally bound to offer to uninsured poor patients, he added.
Medicaid expansion "will be very hard for states to turn down," Levitt said. "If governors do this, it will be for ideological reasons, not economic reasons."
Still, those political decisions don't have to be made until 2014. In the meantime, UnitedHealth Group and other health insurance companies must rely on financial fundamentals to calm nervous shareholders.
Given the market's reaction to health insurance stocks in the wake of the Supreme Court decision, UNH's second-quarter 2012 profit numbers -- due July 19 -- are more important than ever.
"If they beat projections," Gupte said, "they bring some stability."
Jim Spencer • 202-383-6123