Obamacare's diagnosis through the half-month since its rollout has been anything but a clean bill of health. The health-care reform law has suffered under mounting technical glitches that have prevented some Americans from accessing the federal insurance exchange site to apply for coverage. Washington's shutdown and squabble over Obamacare's future didn't help this law's PR.
Still, major IT stocks tied to Obamacare's launch, such as online insurance marketplace eHealth (EHTH 4.63%) and health care.gov architect firm CGI Group (GIB 1.48%) have soared despite the law's mounting challenges. America's biggest insurance stocks, such as WellPoint (WLP +2.43%), have crushed Wall Street's gains in 2013 even with a murky future ahead for the insurance industry.
While these stocks have surged, are investors at risk from Obamacare's teetering public image? Scams and security concerns over the federal exchanges' privacy have cropped up in the past few weeks. If Obamacare regulators can't win the PR battle and convince America that health care reform's safe and secure, this law might never get off the ground.
Rising costs, flailing regulators
Much of the criticism over Obamacare's technical malpractice has come over the Healthcare.gov website's glitches. The site crashed within several minutes of the law's deployment on Oct. 1, and widespread technical problems have mounted throughout October. Even the introduction of virtual "waiting rooms" to ease in traffic to the sites hasn't helped much. Meanwhile, the government shutdown and individual state exchanges have left online insurance markets like eHealth struggling to integrate with the new law's many systems.
Some of the blame's been pointed at CGI, which won the federal award to build Healthcare.gov. According to a report from Reuters, CGI's total work on the federal exchange website has soared to $196 million, far above the spending first allocated for the site -- and that's before potential options are counted in. Blame the government's procurement process, not CGI, for that -- see the defense sector for myriad examples of Washington's runaway costs -- but to spend so much money on a technical disaster hasn't won Obamacare any favors.
Unfortunately, things could get worse. According to The New York Times, missed deadlines and withheld funding pushed back the construction of the federal exchange site. Regulators and contractors ended up adding changes and fixes to the site less than a month before Obamacare launched. The result? Not only is the site glitch-ridden, but it's also a potential gold mine for hackers and scammers.
Technical headaches galore
An Obamacare exchange employee in Minnesota already released more than 2,000 Social Security numbers and other private data on accident before the law even launched. Online security entrepreneur John McAfee predicted that scammers could set up fake websites to deceive Americans and steal personal information with ease. And with Obamacare's push to convert health records to electronic formats, hackers have another route into accessing millions of Americans' private information.
The Better Business Bureau and FTC have begun trying to spread information on potential scams, but all it will take is one critical breach of the federal exchanges' security before America's trust in the law will be shredded. Obamacare needs an estimated 7 million uninsured customers to sign up in order to spread out the costs of care and prevent the system from failing financially, but with enrollment numbers already estimated out as lower than expected, a major breach of trust would end any hope of hitting that goal in the law's first year.
And if that happens, the law's future -- and investors -- could be in for serious trouble.
How will stocks shape up?
As the federal contractor behind the Obamacare federal site, CGI's the first stock to look at if the law's hit by a major scam or hack. However, any tech-related failure of the law will affect the company's future more than its present. CGI's already been awarded its government contracts. However, there is an opportunity cost here: As fellow analyst Sean Williams points out, CGI could see potential future business dry up if Obamacare's technical problems grow worse.
eHealth's another story. The company sells individual plans outside the exchange right now, but any tech- or security-related backlash against the law would probably spread to eHealth's own business. One caveat: If eHealth can successfully manage and promote its own site as a reliable alternative to Healthcare.gov, it'll be able to capture many uninsured consumers in serious need of coverage before the tax impact of the individual mandate kicks in early next year.
However, eHealth and other online insurance markets do have to integrate with the federal exchange's servers, something that's been a stumbling point so far. In addition, a non-technical issue -- the projected rising costs of monthly premiums and deductibles -- could mean a hit for not just eHealth's outlook, but also for Obamacare's itself. Considering that eHealth's stock has soared by 55% over the past three months, this stock could be setting up investors for a disappointment if Obamacare's technical issues continue for weeks and months.
Insurers could also see a negative impact from the technical glitches if potential customers are turned away from the federal exchanges. However, companies such as WellPoint, which gambled heavily on Obamacare by opting into Covered California, the Golden State's state-run exchange, could still benefit. Because California and other states maintaining their own exchanges operate separately, WellPoint could still see a big benefit from previously uninsured customers looking to find insurance, even if the federal exchanges fail. Considering that WellPoint's also among the biggest insurers in the country by membership, it (and other giant insurers) are a safer bet for investors wary of Obamacare's murky future.
Investors' safe play
It's been less than a month since the federal exchanges opened, so projecting that the current technical issues continue for the long term is premature. However, with disappointing early sign-up numbers and the reports of scammers and hackers capitalizing on Obamacare's haphazard rollout, investors counting on health-care reform's smooth launch could be in for a rude wake-up call in the near future.
CGI, eHealth, and other stocks have risen behind health care reform's potential, but investors' best play is to stay conservative and cautious with their portfolios. Until we know more about whether Obamacare will succeed or fail -- and whether technical issues will plague the law into the future -- it's safer to stick to the investing basics and buy and hold reliable stocks for the long term.
