Why Health Reform Won't Distort the Insurance Business Model

by: Sydney Williams

When it comes to health care reform, it seems the more likely that government will pass legislation, the more sanguine Wall Street gets that nothing will occur. Government-run health care? Won't happen. An evisceration of the private insurance business model? No way.

Consider this. From its March 9th low to August 14th, the S&P 500 surged 48%. Over the same period, four of the five largest commercial health plans (by lives and market capitalization) outperformed the major index.

In fact, during this stretch of 111 trading days -- that's five and a half calendar months -- Cigna (NYSE:CI) never underperformed the market. Humana (NYSE:HUM) did so once, way back on March 11th. And WellPoint (WLP) dipped below the market on seven occasions, the last time on April 3rd.

UnitedHealth Group (NYSE:UNH) stumbled 19 times, mostly during a bad stretch in late March and early April. Now its shares stand ten percentage points higher than the market average. Even Aetna (NYSE:AET), which consistently underperformed, is 38% higher on an absolute basis.

See the chart below covering this trading period. The red line is the S&P 500.

The comparison also extends to other components of the health value chain. The maligned health plans have outperformed each of the major stakeholders. The S&P 500 is higher (marginally) than the major pharmacy benefit managers -- Medco (NYSE:MHS), CVS Caremark (NYSE:CVS) and Walgreen (WAG) -- and trouncing the drug manufacturers by more than 20 percentage points.

To be fair, it's FDA uncertainty, not congressional power-broking, that's weighing heavily on the drugmakers. And depending on its structure, a pathway enabling follow-on biological products could improve prospects dramatically. Both house and senate bills feature it, and traditional foes seem closer to finding some sort of resolution than ever before.

So, what's the health reform fuss all about anyway? Well, if you're an investor, it's making for good entertainment.

Indeed, the market's great discounting mechanism reveals prospects so strikingly different than the constant news media coverage that it can't be right, right?

Well, no one can ever be sure. But let's just say this. Not since 1994 have lawmakers threatened major overhaul to this extent. With the party seeking to upend private insurance holding majority control, passage would have seemed inevitable – if not a full-on government option, then something damaging, at least, to the current business model.

That, to several high-minded folks, seemed the intent.

Despite this, and except for company-specific issues, investors never marked down the industry's prospects, even during the worst of the mudslinging and the darkest days of apparent unity among the ruling party.

And let's not lose sight of the fact that this is turning into one fine example of market rationality, while total hysteria grips the Hill and many corners of Main Street.

Maybe Wall Street isn't so villainous after all.

Maybe lawmakers should take care in turning their reform plans to that potent discounting mechanism.

It could be the only thing that keeps us sane.

Disclosure: No Positions