Midterms Could Upend Health-Insurance Stocks
NEW YORK (
) -- Congress is set to play a major role in the health insurance sector as the midterm elections throw healthcare reform into the political buzz saw.
While Republicans will likely not be able to repeal the new health care law any time soon in a divided Congress, they may have enough power to fight portions of the law at the state level and fight harder for the health care insurance industry.
"We see a little sell on the news, but the managed care industry is trading at a discount to the broader market," said John Sullivan director of research at Leerink Swan.
"Managed care stocks like
UnitedHealth
(UNH) - Get Report
and
WellPoint
(WLP)
are doing well. The psychology is lifting them at the moment and the only thing that keeps them in the single digit multiples is sentiment," added Les Funtleyder, a portfolio manager at Miller Tabak.
Earnings in the health insurance sector have been solid and valuations are also good for investors, said MorningStar analyst Matthew Coffina. Sentiments holding healthcare insurer stocks back include uncertainty over how the Republicans may go about trying to repeal parts of healthcare reform or even defund the bill.
"Republicans may talk about repealing the bill, but they don't have a majority of the votes to do that," said Coffina. "If they take out parts of the bill, it will all fall apart. If the funding for the bill isn't pushed, it will just create a mess for the states that can't afford to do it on their own and cause consumer disruption."
It is also highly doubtful that Republicans will be able to defund the reform bill because a majority of the funding is already in place, explains James Owens, a partner at Paul, Hastings, Janofsky & Walker.
Any disruption of the funding mechanism would not be productive for businesses or consumers because the move may cause a government shutdown similar to what happened in 1995, said Funtleyder. "For this reason I would be very surprised if any defunding happens," Funtleyder explained.
"Defunding is an ineffective tool until 2014, and by then industry won't want defunding, because the fees and taxes they've been paying can finally be offset with 30 million new covered lives," Sullivan added.
Where Republicans could make political headway on the healthcare reform issues is at the state level. Several state Attorney Generals, including Attorney General-elect Scott Pruitt in Oklahoma, are looking at ways to disrupt healthcare reform in their state. That issue could end up being reviewed by the Supreme Court.
"More impactful to insures is what is happening at the state level to the extent that favors managed care companies. If you have a Republican state governor then that will be helpful to them," said Funtleyder.
"I think some companies such as Humana and UnitedHealth that are involved in Medicare Advantage cuts could be affected. The overhand on Medicare could be removed and they will be at a greater advantage then they were pre-election," said Coffina.
"We think WellPoint will be able to outperform and
Cigna
(CI) - Get Report
will benefit by the improving economy and also because it is focused more at the corporate insurance and less on Medicare," said Sullivan.
Even if state governments fight the bill, the focus of the government on the economy should improve the healthcare sector, boosting employment in the sector, profitability and stocks. However, political posturing around the reform could create wholesale defections by multiline insurers and regional players as wells as force more consolidation, said Sullivan.
"Anyone who doesn't have scale will likely be acquired," said Coffina. "Smaller regional insurers are also acquisition targets. Going forward, the Blues
Blue Cross
and
Blue Shield
are also going to be targets of large companies."
Some businesses likely to be acquired include
Health Net
(HNT)
,
Humana
's
(HUM) - Get Report
commercial business and
Coventry
(CVH)
, said Coffina.
Healthcare insurers such as WellPoint and UnitedHealth are set up the best to be acquirers as the market contracts. UnitedHealth recently scooped up both Health Net's Northeast's licensed subsidiaries and
Principal
's
(PFG) - Get Report
medical insurance businesses. WellPoint also has $3 billion in cash set aside to make acquisitions in the sector.
--Written by Maria Woehr in New York.
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