Health insurers just got some coverage of their own.

Thanks to a unanimous ruling by the Supreme Court, health maintenance organizations are now shielded against medical malpractice lawsuits filed against them in state court. The decision reverses a lower-court ruling that would have allowed patients to sue HMOs in state, rather than federal, court for denying coverage for doctor-ordered treatments.

Still, the decision -- already anticipated by some -- may not limit the industry's exposure forever.

"The issue of whether and in what manner managed care companies can be held liable for medical malpractice has been debated extensively over the past seven years by Congress, which tried but failed several times to pass national 'patients' bill a rights' (PBOR) legislation," explained Goldman Sachs analyst Matthew Borsch, who has a neutral outlook on the sector. "Congressional action on PBOR is dead for now, although today's U.S. Supreme Court decision could reignite the debate."





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-- the two insurers that won the industry's battle -- were nevertheless lower in afternoon trading, depressed by a

Wall Street Journal

story suggesting the industry is feeling pricing pressures. Aetna was down 73 cents to $84.89 halfway through Monday's session. Cigna fell even harder, $1.14 to $68.01.

Aetna faced a lawsuit in Texas for switching an arthritis patient from Vioxx to a cheaper painkiller that, the patient claims, "nearly killed him and caused permanent damage," Borsch reminded. Cigna had been slapped with a complaint, also in Texas, for allegedly allowing a woman to spend only one day in the hospital for a hysterectomy that later triggered complications, he added.

Both cases have been closely watched by the entire HMO sector.

"The potential liability to Aetna and/or CIGNA under these specific cases was less important than the precedent for the managed care industry as a whole," Borsch wrote.

Borsch actually predicted months ago that the HMOs would win their cases. By then, however, he had already adopted a cautious stand on the sector for other reasons. As previously reported by


Borsch believes that publicly traded health insurers will suffer as their nonprofit counterparties begin offering more competitive prices following a banner year of profitability in 2003. Borsch stated just last week that his forecast of an industry downturn already has started to come true.

"We believe an industry downturn is now at hand and expect underwriting margins to contract in 2005-2006, with some companies already negatively impacted by pricing and underwriting issues," he wrote. "However, we continue to expect the downturn will be relatively mild compared to past cyclical downturns, implying most managed care stocks are undervalued from a long-term perspective."

In the meantime, Borsch points to Aetna as his top pick in the sector. He believes the company has stronger growth opportunities than most. But he still offers words of caution about the industry overall. For starters, he says that hospital costs are simply stabilizing instead of dropping as they did last year. Moreover, he says that HMOs have yet to see the employment rebound translate into meaningful enrollment growth and expects the industry to miss 2004 expansion targets as a result. He also doubts that new mergers -- like the one combining


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-- will fuel the sector this year.

Borsch's concerns, cited in

The Wall Street Journal

article, put fresh pressure on the industry's shares. For example,


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-- currently the largest player in the sector -- was down $1.14 to $62.86 during the afternoon session. The company, which traded for $68.50 in April, will kick off the industry's earnings season next month.