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Health Insurers' Universal Uncertainty

By Brian Orelli, PhD - Updated Apr 5, 2017 at 8:08PM

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Universal health care is putting a damper on insurers.

One thing is universal about the stock market: In bull and bear markets, from mining to health care to retail, investors hate uncertainty. That which is known -- even bad news -- they can handle. But if investors don't know what's going to happen, the worst-case scenario usually gets priced in substantially.

Such is the case for health insurers. Usually, an election brings certainty and closure, but for health insurers, Barack Obama's plan to ensure that all Americans have health insurance breeds more questions than answers. That fogginess has been holding down the prices of the insurers shares.


(Decrease) in share price since the election

UnitedHealth Group (NYSE:UNH)


Humana (NYSE:HUM)


Coventry Health Care (NYSE:CVH)


Aetna (NYSE:AET)


Cigna (NYSE:CI)


WellPoint (NYSE:WLP)


Source: Capital IQ, a division of Standard and Poor's.

Health care for all
The uncertainty stems from the fact that it isn't just Obama's unilateral decision about the best way to get all American's covered; 535 legislators also get to have their say, which leads to a wide variance in what the final product could look at. That could also be why Obama asked Tom Daschle to be Secretary of Health and Human Services -- he has a lot of experience dealing with legislators, since he was the Democratic leader in the Senate for 10 years.

One extreme possibility would be a government-run nationalized health care plan like the systems in Europe. That seems unlikely, but it would pretty much end the role of private health insurers as we know it.

It seems most likely that the insurance companies will end up in a partnership with the government. There's certainly precedence for public-private system, with Medicare Advantage and the Federal Employees Health Benefits Plan. The system is likely to come with lower margins for the private insurers, but hopefully the health insurers would be able to make that up with larger volumes, if everyone is covered.

The biggest problem with a low-margin system is that when the companies guess wrong by underestimating the cost of health care, the losses will be magnified. That was especially true of Humana's Medicare drug program, which hurt the company substantially earlier this year when the company overestimated its members' use of high-cost drugs.

The lower margins -- and depressed stock prices -- could spur some consolidation in the industry. That wouldn't be such a bad thing for investors, since fixed costs eat into shareholders' profits.

The added benefit of a majority of people being insured is that it could lower the costs of insuring members in the companies' commercial programs. People who always have insurance tend to be cheaper to insure, since they're less likely to let medical problems fester by waiting to get insurance before they seek help.

Economy First
Between AIG (NYSE:AIG), the car companies, the banks, and you and I, it seems that fixing health care will take a back seat for the new administration -- at least for a while.

Fortunately, stimulating the economy will benefit insurers, since they make money by investing the premiums they collect before paying for services. A stronger economy with a higher employment rate will also result in more people being insured, leading to higher revenue -- at least under the current system.

Unfortunately, delay will only compound the uncertainty, which is likely to depress stock prices until something is resolved, or the idea fades into oblivion, as it did when Hillary Clinton pushed the idea during her tenure as First Lady.

For everyone's sake, hopefully Obama and Daschle get something done sooner rather than later.

WellPoint and UnitedHealth are Motley Fool Inside Value selections. UnitedHealth and Coventry Health are Motley Fool Stock Advisor recommendations. The Fool owns shares of UnitedHealth. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

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Stocks Mentioned

Aetna Inc. Stock Quote
Aetna Inc.
American International Group, Inc. Stock Quote
American International Group, Inc.
$54.92 (2.56%) $1.37
UnitedHealth Group Incorporated Stock Quote
UnitedHealth Group Incorporated
$537.72 (0.09%) $0.46
Coventry Health Care Inc. Stock Quote
Coventry Health Care Inc.
Humana Inc. Stock Quote
Humana Inc.
$486.00 (-0.36%) $-1.74
Anthem, Inc. Stock Quote
Anthem, Inc.
$481.33 (-0.55%) $-2.64
Cigna Corporation Stock Quote
Cigna Corporation

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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