NEW YORK (TheStreet) -- Now that the Affordable Care Act's official enrollment date upon us, investors could be forgiven for thinking insurance companies are no longer viable investments.
After all, proponents of "Obamacare" promised lower insurance costs from squeezing insurance company's profits and administrative costs. A smaller share of the pie normally results in severe news for investors.
The market has taken the opposite approach, driving shares higher. Aetna (AET), UnitedHealth Group (UNH), Humana (HUM), Wellpoint (WLP), WellCare Health Plans (WCG), and Health Net (HNT) are trading above the level of when Obamacare was sent to the White House for signing.
First, let's look at the some key provisions that appear to negatively impact upon insurers, and how the mandates turn them into the insurer's advantage.Insurance companies will no longer turn down customers because of pre-existing conditions. This provision was championed by many advocates because insurance companies won't knowingly take a customer expected to cost the company money. How this helps insurance companies is they no longer have the expense of the underwriting process along with investigating claims that may be suspect. In a free market, this provision would financially destroy insurance companies. In a free market, many people would simply choose to wait until an insurance policy is a "sure thing" before buying. An uninsured person finding out they need expensive long-term treatment is the type of person expected to have a quick change of heart in determining their insurance needs. Obamacare addresses the "wait until you need it" strategy with its arguably most contentious mandate, the individual requirement to buy insurance. Some people without insurance in 2014 will have to pay a fine starting in 2015. If reality departs too far from theory, and healthy people don't sign up in significant numbers to offset sick people, the next provision may turn into a disaster for insurance companies and their shareholders. Consumers and insurance companies are no longer allowed to agree upon a lifetime cap of insurance coverage. Not having a lifetime cap is like buying home insurance and not telling the insurance company what your home is worth.
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