Can Healthcare Stocks Continue To Thrive? I Think Not

Includes: AET, CI, UNH
by: Adam Alvarez

Let's be frank. I want to avoid health insurance stocks and the sector's industry names like small businesses with 50 or more employees want to avoid having to provide coverage to workers.

Also, there's more than one reason for my dissent on the sector.

Not surprisingly, like many I see glaring flaws regarding the healthcare measure which has recently become law. However, my own unease towards the industry as a whole doesn't just come from a personal disdain for the bill itself.

Sure, healthcare stocks have done very well in recent months. Still, despite the often rocky relationship between insurers and their customers, the two sides still depend heavily on each other. Simply put, the industry can't thrive without having the individuals ready to pay.

This is precisely why a recent quote by Cato health policy analyst Michael Tanner put a real cloud over the future of the industry.

"Customers aren't doing well but the insurers are doing great," said Tanner.

That was the case late last year as the industry saw an increase in customers. Although company enrollment numbers may look good, however, what's the benefit if the main customer base consists of the sick and elderly?

Sure, the law supposedly has measures in place to limit possible insurer losses, as a result of excessive medical claims, with a tax collected off non-exchange insurance products. Still, if this "safety measure" is like anything else with this law, it won't work either.

Despite all the unknowns, though, it could be the one clear thing about this law which may turn investors away from the industry.

The annual fee on health insurers, projected to come in at $8 billion this year, is already facing a plea from companies and members of the House of Representatives calling for its repeal. Nevertheless, the White House remains against such a move.

Now this might not seem like such a terrible thing for the insurance companies. After all, they'll merely pass the tax off on consumers. Of course, whether the consumer's subsequent check actually clears the bank is another thing.

This is particularly questionable considering healthcare rates are projected to rise 2.3 percent this year from just the tax alone. That's not a good statistic for something that's supposed to lower rates overall.

Then there's the tally of those that actually chose to sign up for insurance. At last check, that figure was 2.1 milliion people who purchased private coverage through the exchanges. Unfortunately, and interestingly, the Obama administration did not know the demographics of the enrollees, how many had their policies cancelled before signing up, or who had paid their first month's premium.

Basically, we still do not even know whether these people can actually afford the policies which they've bought.

For investors, this seems a disturbing repeat of history. In the late 1990's, we succumbed to some crazy belief technology stocks would never fall. Now, we've proven even more blind. All the while left to sit in ignorance while we merely assume nearly every citizen will somehow be able to throw a few hundred dollars at insurance plans every month.

With companies such as Aetna (NYSE:AET), Cigna (NYSE:CI), and UnitedHealth (NYSE:UNH), along with most others in the healthcare industry, near 52-week or all-time highs, now just might be the time to take a profit. After all, you'll probably need the extra cash to pay for the insurance premiums.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.