Health Insurers Hammered. Again.

That's the problem with being reliant on the government for spending, whether you're a defense contractor like Boeing (NYSE:BA) or Lockheed Martin (NYSE:LMT) or a health-care company: When the money dries up, the stock suffers.

Yesterday, health insurers were blown away by the Centers for Medicare and Medicaid Services' (CMS) announcement that it plans to raise the 2010 Medicare Advantage payment rates by only 0.5%.

Pretty much all insurers took a beating, and the decline of each stock was generally proportional to how much exposure it had to Medicare Advantage.

Source: Yahoo! Finance.

The increase -- or lack thereof -- isn't set in stone. There will be a public comment period before the agency sets the actual rate in the beginning of April. The minuscule increase is based on an expected 20% cut in reimbursement for doctors. Congress could up payments to doctors -- as it has in the past -- which would result in about a 3% increase in the payment rate.

If not, the companies will either have to take a cut on margins, decrease benefits, or increase premiums. Accepting lower margins doesn't seem like a good idea, and the other two choices could cause members to head back to government-run Medicare.

But that's not a guaranteed result. Of the members who have left Aetna's plans, less than 1% have gone back to the government plan. Even with the cuts or price increases, health insurers should still be able to give seniors some value over the government plan.

Sure, things aren't going to be perfect for health insurers for quite a while, but this looks like it may be another overreaction by investors. The stocks doubled off their lows last November, and it could certainly happen again.

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