The health care reform overhang is ending, making 2010 a safer time for investors to look at health care names. But is it already too late to find attractive pricing among the sector's large-cap players?
Managed care stocks have experienced quite the run-up as a resolution in healthcare reform has become more visible.
There was no health care sub-sector in which the reform overhang was more damaging to stock performance than managed care. Even today, managed-care stocks are still trading at approximately two-thirds of the broad market p/e ratio, demonstrating the ongoing skepticism of how well managed-care stocks can perform post-reform. Cigna ( CI) has led the way in the recovery of managed-care stocks. Is the run done? The 2010 story for Cigna and the managed care universe is, first and foremost, that the reform overhang will be gone and it will be a year of transition. Curbs on business will be significant: excise taxes, lifetime caps on benefits, and the inability to exclude pre-existing conditions, among them. Costs associated with these changes may not be passed on to customers until after 2010. The market perception is that Cigna's tilt to the commercial business (80% of which is self-insured and not subject to adverse impact from higher COBRA enrollment), and its 40% ex-U.S. business stream, will insulate it from many of the reform package cost targets. Still, some analysts point out that many of those Medicare cuts aren't going to kick in immediately in 2010 -- maybe not until 2014 -- making it hard to see much more room for movement up in Cigna shares in the short-term.