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Whether you agree politically with Obamacare or not, if you have holdings in the insurance sector you need to keep a vigilant watch on some companies because of the latest move by the government to force insurers to cover unpaid patients, even if they suffer a loss as a result.

This is a move by the administration to deflect responsibility for the fiasco to insurance companies because of people losing their coverage as a result of the law, according to Forbes.

How it's going down is the health plans that were held by some consumers got canceled, and now they have no health care heading into 2014. The White House has decided to use extreme pressure, communicating to insurers that it wants them to provide insurance to those that have lost it, no matter what the consequences are.

On the surface this is made to look voluntary, but the language of the 'new' regulations of U.S. Department of Health and Human Services says it may move health plans currently qualified off of the exchanges in 2014 if they don't comply with the "request" of the government.

Unpaid premiums is the biggest issue, with other considerations being refilling prescriptions that were covered under prior plans, and to act as if out-of-network providers are in-network in order to "ensure continuity of care." What that really means is including the more costly insurers in the plans. Unpaid premiums are the biggest thing to watch, and the issue that will have by far the biggest negative impact on companies.

It's interesting to see these insurers potentially eating the consequences of a health plan they backed and wanted.

Companies Most Affected

Based upon the number of uninsured eligible people who qualify for exchanges, here are the top 5 insurance companies that will be affected by the situation: Aetna (AET), Humana (HUM), Cigna (CI), Molina (MOH) and WellPoint (WLP).

(click to enlarge) source: StockCharts.com

The challenge with all of these and other insurers for investors, is there is no way of knowing the depth of the effect on them if they go along with this idea.

If they do, there isn't a reliable way of projecting how many people would sign up for the plans. All one can do is understand, based upon the order of the companies listed above, the exposure they have to this new situation.

Assuming the insurance companies give in to the demands, investors at least can see among these companies the probable order of the impact.

(click to enlarge) source: StockCharts.com

The Companies

Aetna has come out and said it won't reinstate insurance plans that have been canceled, nor will it extend them. It is the largest insurance company so far to say it won't do so. It is the third-largest insurer in the U.S. One report says the company will give people until Jan. 8 to pay their premiums.

Overall Aetna offers plans in 16 states, which covers approximately 30% of the exchange marketplace. For the long haul, Aetna said it should add customers in close to 15% of the exchange marketplaces.

If Humana experiences a significant number of new Obamacare customers under the proposed parameters of the HHS, it could be hit very hard because of it experienced a weak third quarter as a result of higher costs. Earnings in the latest quarter fell 14%, making it vulnerable if it accepts the "request" of the White House.

(click to enlarge) source: StockCharts.com

Cigna said it has a new team in place that is trained to deal with issues related to new enrollees after January 1, 2014.

According to Molina Healthcare Chief Executive Officer J. Mario Molina, his major concern is having at least some information in the company's database so that if there are some people that get medical services performed, it will at least have something to go on.

(click to enlarge) source: StockCharts.com

If people don't show up in the database, it would be a nightmare to figure out, as it will be with all the insurance companies.

Finally, Wellpoint should do fairly well in this scenario, as will Molina, because of the significant exposure to Medicaid for the two companies, which has experienced the most sign ups under Obamacare to this day. Expectations are Medicaid enrollment will continue to grow.

The two companies shouldn't have near the potential fallout its competitors may have with the new expectations from the HHS.

What May Help the Insurers

Interestingly, what may help the insurers under these difficult circumstances could be the failure of the federal exchange, which has had relatively few of those projected to sign up, do so. That could limit the effect of the unofficial policy of HHS. That's not a given, but it could be a factor.

If they eat a lot of the costs because of being forced to accept customers that haven't paid a premium, the only reprieve may be the poor performance of the exchange itself.

The problem for investors is it adds one more element into an already volatile and complex situation; one which may cause them to pause until things become more clear.

In the short term though, this could have a potentially dramatic impact on some insurers in this quarter and the first quarter of 2014.

(click to enlarge) source: StockCharts.com

Conclusion

If the White House continues to take heat from the terrible implementation of the exchange and young people don't sign up for healthcare, it could take even more drastic steps that could have a negative effect on the insurance industry.

There is long-term potential in the industry, but much of it lacks clarity, and will depend upon how much exposure there is to Obamacare and what type of exposure it is.

Another factor is all of the companies mentioned in the article, with the exception of Molina, have done very well over the last 12 months. With the added pressures from the Obamacare debacle, there is a strong possibility these stocks could pull back if things get worst before they get better.

This pressure from HHS is just the type of negative catalyst that could drag them down. Over the longer term, if the administration and HHS continue to change the game if the system remains dysfunctional, it'll make it harder to project the future performances of the company.

As for the pressure from HHS, some are spinning it as a suggestion, but the fact that it threatens companies with the removal of qualified health plans from the exchanges if they don't comply with their request, makes it at its core an unofficial law. This isn't a true request, it is an order. Investors need to keep that in mind as they make decisions on companies with significant exposure to Obamacare.

Source: Obamacare Is Getting More Volatile, Monitor Insurance Holdings