Bloomberg reports that U.S. health stocks are poised to rally if the overhang of uncertainty is removed by the passing of a healthcare reform. The argument in this article is extremely similar to a post of mine from January (see: Healthcare sector trending up).
The most visible positive catalyst for the industry is that the worst-case reform scenarios – a single-payer system or a public plan with a Medicare-linked fee schedule – are no longer a threat. Managed care companies like WellPoint (WLP) and UnitedHealth Group (UNH) stand to gain new customers as coverage expands to people who previously went without insurance.
A common concern for these insurers is that the government will restrict profitability by scrutinizing rate hikes as we’ve seen in recent months in California, but this concern is not justified. The fact that is important to consider is the cap Congress proposes to put on the medical-loss ratio – the percentage of premium revenue used to pay patient bills – is well above the industry’s historical average, which means that they will not be impinging on profitability as much as feared.
Overhaul or not, health insurers have always found ways to make money and preserve profitability despite government regulation. I don’t expect that to be any different this time around. Managed care, as well as pharmaceuticals, are still looking very cheap relative to the rest of the market, and removing the uncertainty surrounding reform will provide a catalyst to expand valuations throughout the healthcare sector.
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