Finance Banter's  Instablog

 By trying to compromise with conservatives on Capitol Hill, the Democrat-led healthcare reform bill proposed by Senator Max Baucus appears to do more to help the health insurance industry than it does to contain its role in elevating healthcare costs. On the surface the health insurers add little value to the U.S. system as it works today. Americans send their money to the insurance company, which takes a cut of it for themselves as profit and uses the rest to pay doctors and hospitals for the care provided. If actual healthcare costs rise by 5% one’s premiums will increase more than that to maintain the insurer’s profit margins.

Unfortunately, the Baucus reform bill being discussed does little to change that. In fact, it actually strengthens the health insurance industry by requiring everyone to have insurance. That means the insurance industry will, by law, have another forty million or so customers if the bill passes in its present form. Not only that, but the bill does little to bring down the premiums for consumers. Instead it simply has the government subsidize the insurance for those who can not afford to buy it on their own.

Imagine for a second that you work for an insurance company. The new reform bill is going to mandate that people buy your product, even if you don’t want to, and taxpayer money is going to help the less fortunate purchase your insurance. Could this have worked out any better for you, honestly?

It appears that those in the industry fearing healthcare reform under President Obama should calm down. The reform bill being discussed currently really takes aim at only one of the two core issues our country’s healthcare system faces; coverage. It fails to seriously address the cost containment problem that we know will continue to threaten the viability of Medicare and the economy more largely.

In such a case, investors should actually consider looking at the HMO sector as an investment opportunity. The stocks trade mostly for single digit P./E ratios based on fears of what the reform bill will include. While it is true that profit margins will be hurt from requirements to cover those with pre-existing conditions and those who become sick while being covered previously as a healthy person, those lost profits will likely be mostly made up by the fact that more Americans will become customers of the insurance industry. Most of them will be very healthy, and more importantly, very profitable for the HMO companies.

Potential value stock investments in the sector would include large caps such as UnitedHeath (UNH), mid caps such as Cigna (CI), and small caps such as HealthNet (HNT).

Full Disclosure: The author’s clients were long UNH at the time of writing, but positions may change at any time