For insurers, health care debate is a prescription for uncertainty

Last Monday, as President Obama launched a last-ditch effort to save health reform, health insurance stocks took a beating. Again.

Shares of UnitedHealth Group, the biggest U.S. insurer by revenue, fell almost 2 percent to close at $33.10. While the Minnetonka-based insurer's share price ended the week even lower at $32.91, the message was clear, if not entirely new: that any reform package passed by the Democrats is likely to crimp the profits of health insurers.

For UnitedHealth and other health insurance stocks, it's been a roller coaster ride since Obama took office in January 2009 and made health reform a top priority. Shares tend to fall each time health reform gains momentum and rise each time reform falters.

Health reform offers some potential upside for insurers -- namely the prospect of millions of new customers if everybody is required to buy insurance and employers are required to provide it.

But for insurers, the negatives appear to outweigh any positives. They could come under a slew of new regulation. They would have to take all comers and could no longer reject people with preexisting conditions, who likely will incur more in medical costs. They could be subject to new taxes and fees as well as restrictions on premium increases.

All these things, while great for consumers, aren't so good for insurers' bottom lines.

Now, after a period in which health reform appeared stalled, Obama is making a renewed push to get legislation passed.

"I would say, net-net, the whole thing is negative," said Sheryl Skolnick, an analyst with CRT Capital in Stamford, Conn. "It's still a very dangerous time [for managed-care stocks]."

52-week high on Brown win

Stocks go up and down for a variety of reasons. The fortunes of health insurers such as UnitedHealth, Aetna and WellPoint are inextricably tied to the economy. They've lost hundreds of thousands of members as companies laid off workers. During the massive marketwide sell-off last year, UnitedHealth share prices closed at a low of $16.35 on March 5.

But some spikes and troughs were directly tied to the twists and turns of health reform. For example, UnitedHealth stock hit a trough in mid-October, when the Senate Finance Committee passed its health reform bill, with a sole Republican aye from Olympia Snowe of Maine.

An October report by Goldman Sachs framed the issue bluntly: For health insurance companies, the best-case scenario would be no reform at all. The second best-case: weak reform.

The worst: strong reform including a government-run health plan that would compete with private insurers. That so-called public option, however, now appears to be off the table.

When Republican Scott Brown of Massachusetts won a U.S. Senate seat on Jan 19, 2010, something many saw as a death knell for health reform, UnitedHealth stock hit a 52-week high of $35.15.

That, plus positive fourth-quarter results for the industry and the general feeling that managed care stocks were seriously undervalued, sent investors rushing back into the sector.

So far this year, UnitedHealth stock is up 9 percent.

Reform's still alive

Now comes Obama's latest push to pass health reform. This time, he's leveling direct attacks on the health insurers. "We can't have a system that works better for the insurance companies than it does for the American people," he said last Monday at Arcadia University outside Philadelphia.

UnitedHealth defended itself, saying that premium increases are caused by higher medical and drug costs as well as higher treatment volumes, noting that its overall profit margin last year was 4.4 percent. It also maintained that the major health proposals are ineffective because they fail to address those drivers of medical cost.

"That continues to be our belief," said UnitedHealth spokesman Don Nathan.

The president's own health plan unveiled Feb. 22 does tweak the existing bills. Obama proposed increasing tax credits and subsidies for health insurance premiums for lower-income individuals, beyond what was previously proposed. He also delayed a proposed excise tax on high-end or so-called Cadillac plans by five years to 2018 and raised the level of premiums that are exempt.

Both are positives for insurers.

However, Obama further watered down the individual mandate by reducing penalties for those who don't buy insurance. That's a negative for insurers, since people may simply delay buying coverage until they get sick.

Ultimately, the market hates uncertainty, and reform has certainly offered lots of it.

"A fair number of us assumed that when Brown was elected in Massachusetts, [reform] was dead," said David Heupel, portfolio manager at Thrivent Asset Management in Minneapolis. "Now it's March 2010 and it's still the driving conversation."

At this point, Heupel said, even if reform passed and it was negative for the industry, at least there'd be some certainty. "We could sit back and run some long-term numbers and value these companies," he said. "The frustration would end."

Chen May Yee • 612-673-7434