Sweeping health care reform -- a major goal of the new Democratic-controlled Congress -- could bring relief to hospital companies but hurt managed care giants. Big companies in both groups could attract buyers looking to capitalize on looming changes in the meantime. In recent years, hospital companies like giant HCA have suffered dearly as a result of mounting bad debts from the uninsured. In contrast, managed care players such as UnitedHealth ( UNH) have capitalized on opportunities created by the same uninsured crisis. Specifically, they have rolled out consumer-driven health plans aimed at providing affordable -- if limited -- health care coverage to those who cannot pay for richer, more traditional benefits. Hospitals have seen their unpaid bills, worsened by high deductibles and co-payments, keep climbing as a result. Meanwhile, health insurers have flourished with help from explosive growth in their consumer-driven offerings. Now, however, top Democrats have started calling for new programs that promise fuller health care coverage for all Americans. They are pushing for rich benefits rather than the skinnier packages favored by Republicans and heavily promoted by major health insurers. That kind of coverage would be good for hospitals and bad for consumer-oriented HMOs. Still, most experts foresee more routine developments in 2007 -- such as ongoing industry consolidation -- before revolutionary changes can take place.
"Trying to make major changes in the health care system is such a political challenge," notes Massachusetts investment strategist Peter Cohan.
"The theme of 2007 in the managed care group could very well be that there is no theme," CIBC World Markets analyst Carl McDonald wrote earlier this month. "That doesn't mean the stocks in the group can't work. ... But it does suggest that company-specific catalysts will be far more important over the next 12 months than they have been in the past."
"UHS should seriously consider strategic alternatives to maximize shareholder value, in our view," Lieberman says. "However, we think this is extremely unlikely due to Mr. Miller's desire to retain control of UHS." Lieberman views Universal, like Community, as a safe bet nonetheless. His firm has no business ties to either company.
Still, McDonald has no other real complaints about the company. He has an overweight recommendation on Cigna and the managed care group as a whole. But Cohan, for one, feels cautious about the entire health care industry. "I would just stay away from it," warns Cohan, who has no position in health care stocks himself. "Health care is at the whim of factors that investors -- and even CEOs -- cannot control. So it doesn't look like a very attractive area to me."