MarketWatch: Health care reform good news for insurance industry

by: desmoinesdem

Wed Dec 23, 2009 at 07:00:00 AM CST

"Health care investors find themselves having confronted their greatest fear, and, while there will be legislation, it will be significantly watered down from the version that the left had sought," said Mike O'Rourke, chief market strategist at BTIG LLC.

Shares of insurer Aetna Inc. [...] gained 4.7%, while Cigna Corp. [...] rose 3.9%, helping make health-care among the better-performing sectors of the S&P 500 Index's [...] 10 industry groups. [...]

The Senate's move prompted Gregory Nersessian of Credit Suisse to raise his price targets on seven insurers: Aetna, Cigna, Amerigroup Corp. [...], Humana Inc.[...], Molina Healthcare Inc. [...], UnitedHealth Group Inc. [...] and Wellcare Health Plans Inc.[...]

"In our opinion, the [bill] is a positive first step toward improving some of the more dysfunctional elements of the health-care system," Nersessian said in a note to clients. "The heavy lifting will come when Congress is forced to slow the rate of medical cost growth through more aggressive payment restrictions and utilization controls down the road."

Some key provisions were added to the bill just before the vote, mostly relating to standards on how much the industry must spend on medical expenses. But it appears none of these will impose great hardship on any insurers.

By the way, "utilization controls" means more denials of coverage for medical procedures.

Market analysts know an industry giveaway when they see one, and they are bullish on insurance company prospects. Others have pointed out barriers to enforcing the new insurance regulations, such as the ban on rescissions.

Yesterday President Obama praised the Senate for "standing up to the special interests -- who've prevented reform for decades, and who are furiously lobbying against it now." But in fact, the insurance industry's main lobbying arm has gone quiet of late, because they got everything they were seeking in the health care bill.

Jason Rosenbaum discussed the relationship between insurance company practices and stock prices here:

Wall Street is what has turned our nation's health care companies into profiteers. 16 years ago, before most of the insurance companies were publicly traded, they spent 95% of premium dollars on health care. That level is comparable to Medicare, which spends 97% of premium dollars on care. But once these companies went public and started trading on Wall Street, the relentless drive for profit drove down that percentage to where it sits today, at 81%.

Wall Street pressures directly caused insurance companies to deny more care. Wall Street accelerated the process by which insurance companies deny as much care as they can, which forces more people into bankruptcy (when they have to pay out of pocket for care their insurance company won't cover) and leaves millions uninsured (if you're bankrupt, it's hard to pay premiums). And being uninsured can be a death sentence.

The way Wall Street responds to the health care debate drives these companies. When insurance company stock prices catch fire as the public health insurance option is killed in the Senate, you can bet that these companies are watching and feel supported in their effort to kill any and all health reform that would hurt their bottom line.

I understand why some progressives support passing this bill despite its flaws, but I see no strong cost controls, no path to greater competition and no guarantee that state insurance commissioners will end abusive industry practices.