Will Political Uncertainty Cause Health Insurers to Correct?

Health insurers’ stocks began correcting late last week and may correct some more in response to renewed uncertainty about what kind of health insurance reform legislation, if any, will make it through Congress this year.

After rallying in anticipation of a watered down health insurance reform bill, if any, health insurers and other health stocks face two or three months of uncertainty as President Obama, members of Congress, lobbyists and the public fight over what ObamaCare will be.

Markets weaken in the face of uncertainty, and the uncertainty in the health stocks markets rose late last week as the last House committee approved a bill that includes a somewhat watered down but still strong public option health plan. The Senate Finance Committee’s gang of three Democrats and three Republicans are trying to come up with a bill that would win at least 60 votes in the Senate. If they can’t, the Democrats will try to push through their health care reform in a budget reconciliation bill. But that reportedly would force them to drop a lot of health insurance reforms.

Thus, while House Democrats appear poised to battle over bills approved by three different committees, the fact that four Blue Dog Democrats last week caved in and voted for a bill that provides for the public option health plan creates uncertainty about what all 52 Blue Dogs will do when a bill finally reaches the House floor. Will they put their Congressional careers in jeopardy by voting for a bill that includes a public option, end-of-life counseling, Medicare cuts, tax increases and coverage for illegal immigrants and abortions? It seems unlikely, but it still could happen, especially if public opinion polls show increased support for such a bill.

At the moment, polls show only 41% of voters approve of the way Obama is handling the health care debate. And his overall approval ratings are below where President George W. Bush’s were at the same point in his career. Recall that W. was hardly popular after the Supreme Court ruled for him and against Al Gore. So Obama’s approval rating is surprisingly low, and that is negatively influencing Congressional thinking about health insurance reform legislation.

Yet, Obama and Congressional Democrats are showing they are willing to make compromises that will help them pass some kind of health insurance reform legislation.

How much they’ll have to give up remains to be seen. And that is the big uncertainty facing speculators trading health insurers and other health stocks.

Health insurers seem the most vulnerable at the moment. This is because the industry is being demonized by Speaker Nancy Pelosi and other supporters of ObamaCare.

To date, the insurers have put up a weak defense. Indeed, they’re digging fox holes that may go to China. They’re defending indefensible state and federal laws and regulations that they helped write and even wrote in many cases. Those laws and regulations allow them to medically risk rate individuals and small groups instead of community rating them. Congress is strongly in favor of community rating, which would force health insurers to act like insurers instead of letting them insure only low-risk people.

If the insurers accepted community rating, the public option might be compromised away. But they’re gambling on gridlock.

At this point, speculators on Intrade.com are betting that there’s a 41% chance that health care reform will be enacted by Jan. 1, 2010. That’s up from just below 30% early last week.

The Intrade health care reform market has been volatile, and that volatility probably will continue well into the fall.

Look for the same kind of volatility in health insurance stocks and other health stocks.

Charts for health insurers are here.

Charts for hospital chains are here.

Charts for drug makers are here.

Charts for medical device and supply makers are here.

Charts for long-term care stocks are here.

Chart for health stock exchange traded funds are here.

Click on a chart to see a gallery of charts for a stock or ETF.

Disclosure: I own BDX and options on STJ.