Health Insurers: How They're Escaping the Noose

by: Rick Newman

President Obama has vilified them, and free-market defenders have worried that health care reform could drive them out of business. But health insurers seem to be quite hale, thank you.

Health reform is obviously a work in progress, with dozens of factors that could still tilt the outcome one way or another. But here’s one way to track the possible winners and losers: Follow the stock prices. Most ordinary people find it impossible to keep up with thousands of pages of proposed legislation that come and go, but professional investors get paid—quite well—to analyze all of that info and act on it.

In recent weeks, they’ve become extremely bullish on insurance companies. Over the last month, the S&P 500 stock index has drifted down by about one percentage point, as investors take a breather following the remarkable bull rally that started in March. But health insurance stocks have skyrocketed. Cigna’s (NYSE:CI) stock is up by 19 percent. Aetna (NYSE:AET) is up 13 percent. WellPoint (WLP), 12 percent. UnitedHealth (NYSE:UNH), 11 percent. If you’re wondering whether this could be an overall insurance rally, guess again. Insurers without a healthcare business, such as Allstate (NYSE:ALL), Progressive (NYSE:PGR) and the Travelers (NYSE:TRV), are all down.

Pair those health-insurer spikes with developments in Congress and the correlation becomes obvious. The Senate recently dropped a government-run insurance plan from its reform proposal, making it unlikely that a “public option” will be part of a final bill. Another idea, to extend Medicare coverage to people as young as 55, seems to have died as well, after independent Sen. Joseph Lieberman of Connecticut (Aetna’s home state) vociferously opposed it.

Had either of those plans gone into effect, they could have siphoned customers away from private-sector insurers. But now that threat is diminishing. Former Democratic leader Howard Dean, who favors a public option, has even called the latest Senate reform bill “an insurance company’s dream” and argued that most true reforms have been stripped out.

To some extent, health insurance stocks are catching up with the broader market. Many of those stocks trailed the overall market as the big rally took off in the spring and summer, depressed by uncertainty over how radical health reform would turn out to be. But insurance companies have probably never been as threatened as the overwrought rhetoric suggested. “This won’t be that punitive to the industry,” says Dirk van Dijk, chief equity strategist at Zacks Investment Research. Insurers might even stand to gain customers, if new rules mandate coverage or provide subsidies to help people who don’t have insurance buy it. Villainous or not, this is one resilient industry.

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Disclosure: no positions