At the end of 2019, coronavirus was barely on the radar for major health insurers, including UnitedHealth Group (NYSE:UNH), Anthem (NYSE:ANTM), CVS Health (NYSE:CVS), and Cigna (NYSE:CI). Transcripts of each company's earnings calls held between Jan. 15 and Feb. 5 fail to even mention the novel coronavirus or COVID-19, the illness it causes. As the outbreak spreads, government intervention could lead to significant costs for these and other health insurers.

Array of vials with one marked Covid-19 held by blue gloved hand

Image source: Getty Images.

Testing deemed an essential health benefit

The Department of Health and Human Services (HHS) designated testing for coronavirus an "essential health benefit." This requires that the test be covered by insurers as well as Medicare and Medicaid. This tactic eliminates any out-of-pocket costs that may have deterred people from getting tested. Vice President Mike Pence said 1.5 million coronavirus test kits were being shipped to state and academic labs authorized to run the tests.

On March 5, Cigna announced full coverage for all coronavirus tests. It will waive all copays, coinsurance, and deductibles for its members in an attempt to stop the rapidly spreading virus. CVS quickly followed suit, eliminating copays for coronavirus testing for its Aetna members.

How much will it cost insurers?

There are two unknown components to this equation. First, how many people will be tested? This depends on how widespread COVID-19 becomes. There are approximately 329.4 million people in the U.S., according to the U.S. Census Bureau. The 1.5 million test kits being shipped across the U.S. represent only 0.5% of the population. Let's assume 5% to 10% of the U.S. population ultimately gets tested. That translates to 16.5 million to 33.1 million people. The actual number may be much greater.

The second part of the equation, testing cost, is also far from straightforward. There is the expense of the test kit and the cost of analyzing the patient's sample; these costs vary according to the type of test used and where the analysis occurs. The Centers for Disease Control and Prevention (CDC) authorized state and academic labs to conduct the tests. However, large diagnostic companies Quest Diagnostics (NYSE:DGX) and LabCorp (NYSE:LH) entered the fray following separate announcements on March 5. Each company will sell its own test kits and analyze them in company-owned certified labs.

It's unclear what the prices of kits and the cost of analyzing samples will be, particularly as bigger companies get involved and the tested becomes more widespread. Therefore, for illustrative purposes and based on other marketed diagnostics, let's look at a range of $500 on the low end to $1,500 on the high end. Assuming 5% of the population, or 16.5 million people, get tested, the financial burden will range from $8.3 billion to $24.8 billion.

Spread among many health insurers, this amount can probably be absorbed without dire consequences. For reference, UnitedHealth, Anthem, and Cigna collectively repurchased shares to the tune of $9.2 billion in 2019. The companies could halt further stock buybacks if the need for extra capital becomes urgent.

The situation looks much bleaker if we assume more people will get tested. What if 10% of the population warrants testing? In that scenario, the financial impact could range between $15.6 billion and $49.6 billion. Huge numbers like those will likely cut into profits, which in turn could lead to a sell-off in health insurer stocks.

Historically, the big health insurers have successfully managed outbreaks like SARS and H1N1 swine flu. While shares may have fluctuated in the near-term, buy-and-hold investors ultimately saw the stocks recover. The speed and breadth of the current outbreak begs the question "Is this time different?"

Congress takes action

Approved by an overwhelming 415-to-2 vote in the House, an $8.3 billion bill to fight Covid-19 quickly advanced through the Senate before being signed by President Trump. The CDC will receive $2.2 billion, including $950 million to support efforts by local and state agencies to control the virus.

The National Institute of Allergy and Infectious Diseases will get $826 million to develop vaccines, treatments, and tests. Another $61 million is earmarked for the Food and Drug Administration to expedite the review of new treatments and handle drug and device supply shortages arising from manufacturing disruptions due to the outbreak.

The bill lifts existing constraints for Medicare's payments for telehealth services. This enables remote consultations with doctors, eliminating the need to visit a hospital or doctor's clinic. Companies that specialize in virtual health like Teladoc (NYSE:TDOC) stands to benefit from this provision.

The additional spending may help curb the spread of COVID-19, which, in turn, should ultimately lower its financial impact on health insurers. But right now no one knows what that impact will be. From an investment point of view, it may be best to wait and see how the insurers fare before buying new shares.