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Health Reform Would Help Insurers

Stocks in this article: UNH WLP AET

NEW YORK ( TheStreet) -- Insurance-company stocks have risen on hopes that health care reform will be stillborn. The opposite ought to be happening. Reform would widen and enlarge companies' customer base, and, for the most efficient insurers, substantially higher profits.

House and Senate health care bills call for the biggest changes in 40 years. Both would extend coverage to tens of millions of uninsured Americans while curtailing costs. They also would extend the Medicaid program for the poor and put restrictions on insurers. Republican Scott Brown's surprise victory in the Massachusetts Senate race imperils President Barack Obama's health care plan, a centerpiece of his presidential campaign.

Health-insurance companies' margins are about the slimmest of any business in America. Operating margins are about 2% -- for every $100 in revenue, only $2 is earned. Companies that dominate a region are able to charge more, and their margins increase to about 3%. WellPoint's (WLP) margin was 7.9% in the first half of last year. Increased membership and reduced medical expenses have widened profitability. In contrast, smaller rival Aetna (AET) has a margin of only 1.8%.

UnitedHealth Group (UNH), which has 70 million customers in the U.S., would stand to gain significantly from an increased number of members. A total of about 46 million Americans currently have no health insurance. The U.S. health care industry is massive, with total premiums of $450 billion. Reform would have boosted the size of the sector, leading to a potential average increase in premium income of about 20%.

To be sure, reduced rates for Medicare would hurt some companies. Insurers such as Humana (HUM), among the largest Medicare Advantage providers, would need to adjust costs and expenditures. It could be done profitably. Many insurers in the industry have shown they've been able to stay profitable during the recession by reining in costs.

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