Spitzer Fears Flog Health Stocks

A new segment of the health care industry has found itself in pain.

Managed care stocks -- long among the healthiest performers in the group -- took a pounding Tuesday over fears about a sweeping probe of the insurance industry announced last week by New York Attorney General Eliot Spitzer. News of a fresh subpoena fielded by UnumProvident (UNM Quote - Cramer on UNM - Stock Picks), the nation's largest provider of disability insurance, triggered an industrywide selloff.

Spitzer rattled the entire insurance sector on Thursday by suing Marsh & McLennan (MMC Quote - Cramer on MMC - Stock Picks) -- the country's leading insurance broker -- for allegedly steering business to insurers that have rewarded the firm with lucrative "contingent commissions." UnumProvident previously disclosed that Spitzer's office has requested information about its own compensation agreements with insurance brokers. However, the company revealed on Tuesday that Spitzer is now seeking additional documentation from the company.

UnumProvident pledged to cooperate with the probe and, at the same time, examine its own business practices.

"We will further review our compensation policies and procedures to be sure that we appropriately compensate our brokers but do not create any actual or perceived conflict between the broker and the customer," UnumProvident CEO Thomas Watjen stated. "UnumProvident will not enter into any new compensation agreements until this review is completed."

The announcement bloodied the company's shares, leaving them down 12% to $11.92 -- a 52-week low -- halfway through Tuesday's session.

Spitzer himself has so far failed to identify specific targets in the health insurance sector. However, he has at least highlighted health care as an issue in his complaint against Marsh & McLennan. For example, he points to health care as one of four major business lines whose policy placement decisions have been overseen by the unit allegedly charged with brokering contingent commissions. Moreover, he says that the unit's managing director of health care in 2002 "provided nine of his colleagues with a list of the insurance companies that were paying Marsh pursuant to contingent commission agreements."