WASHINGTON ( TheStreet) -- On the eve of reform, health insurers that were in a fit of palpitations over possible profit erosion released their lobbyists, America's Health Insurance Plans (AHIP), to snuff out pending legislation. Health-insurance companies thought this day would never come. Decade after decade, the industry raised prices faster than inflation and resisted reform while laughing all the way to the bank. Given a seat at the table, they figured that if they played along with a popular president, they could shape the bill to their liking or quietly undermine it with screaming town-hall protesters. The health-insurance companies miscalculated. AHIP issued a report threatening to raise insurance premiums even further if senators and representatives pass the $829 billion plan, which would require Americans to obtain insurance yet impose restrictions on insurance companies from denying coverage on pre-existing conditions. Insanely high health-care costs have finally pushed legislative gridlock past the breaking point. Finance Committee Chairman Max Baucus called for a vote on his health-care reform plan on Tuesday that would get the bill out of committee and off to the floor for melding with the health-reform bills of other committees. The Baucus plan passed by a party-line vote of 14 to 9, with all Democratic Party senators voting in support and all but one Republican in opposition. In a crossover "yes" vote, Sen. Olympia Snowe of Maine warned fellow Republicans and conservative Democrats not to be caught on the wrong side of history on the issue. Her support makes finding a filibuster-proof block of 60 votes easier to secure for final passage.
The AHIP-funded, PricewaterhouseCoopers report titled "Potential Impact of Health Reform on the Cost of Private Health Insurance Coverage" details four reasons why reform would increase the cost of private insurance, which would have to be passed on to customers. Excise taxes on high-cost health-care plans being tagged as Cadillac plans, Medicare cost shifting or the end of the Medicare Advantage program, and new taxes on several health-care sectors would all be negatives for health-care companies if the plan coming out of Congress is coupled with a weak coverage requirement, according to the report. For health reform to benefit, or at least not harm, health insurers, more young and healthy individuals must buy into the system to cover the older, sicker patients with more pre-existing conditions. The report contends that current reform plans fail to bring in enough healthy people and force companies to raise premium costs. If companies cannot pass along higher costs to customers, they could be forced to lose money. The Baucus plan brings another 20 million Americans on to the insurance rolls, raising the insured percentage to 94%. Unfortunately for existing insurance companies, the plan steers many of the uninsured to newly created member-owned, non-profit co-operative companies. Once the legislation hits the floor of the Senate, an attempt will be made to reinsert a government-run public option that the insurance companies will like even less. While no risk-adjusted return model can predict the impact of future legislation, it can follow the pulse of market opinion. Based on Sept. 30 data, TheStreet.com Ratings has "sell" recommendations on three insurance exchange traded funds, with the PowerShares Dynamic Insurance Portfolio ( PIC) rated at D-plus, KBW Insurance ETF ( KIE) rated at D and iShares Dow Jones U.S. Insurance Index Fund ( IAK) rated D-minus. All three funds have rallied since the market bottomed during the first quarter but aren't recommended for purchase. Some of America's Health Insurance Plans' 1,300 members, such as Aetna ( AET), Aflac ( AFL), Assurant Health ( AIZ), Cigna ( CI), Humana ( HUM) and UnitedHealth Care ( UNH), are rated "hold" by our stock model as having little upside potential over the next year.
Odds favor some form of health-care reform passing this year. Until we know for sure what shape that reform will take, new money should be invested elsewhere.