Insurance Company Stocks Rise, Hospitals Drop upon Mass. Election

Published: Wed 20 Jan 2010

Wendy Blair

Yesterday, the prospect of a Republican win in Massachusetts' special election to fill the Senate seat left by the late Edward Kennedy caused large managed-care stocks to rise while depressing the shares of hospitals.

A triumph by Scott Brown, a Republican, over Democrat Martha Coakley would jeopardize the future of legislation to reform the country's health insurance laws by demolishing the Democrats' current supermajority in the Senate. The existence of a Democratic super-majority prevents Republicans from using the power of the filibuster.

The health care reform bill, which the House and Senate are presently negotiating, is seen as a risk for the profits of health insurance companies, despite the fact that the bill promises to deliver millions of additional policyholders to health insurers. On the other hand, hospitals that deal with significant numbers of uninsured patients would most likely benefit from the mandatory expansion of medical coverage to millions of Americans.

The stocks of diversified, major managed-care companies traded up by about one percent to five percent in late trading, with Coventry Health Care Inc. leading the pack. Conversely, hospital stocks plunged by one percent to three percent, with Tenet Healthcare Corp. experiencing the steepest decline.

The stock trends were undoubtedly influenced by election-day poll data that indicated a solid lead by Scott Brown to replace Senator Kennedy, a staunch Democrat who fought for universal health care for decades.

"Health-care stocks are likely to rally in the event of a GOP Senate seat win given the implied higher odds that health-reform efforts are thwarted, notwithstanding investor comfort with the Senate version of reform has increased significantly over the past three months," explained Matthew Borsch, a Goldman Sachs analyst.

Managed-care corporations with considerable exposure to Medicare Advantage, such as Humana, Inc., would probably have the most substantial upside if stockholders believe that health care reform will fail, the investment firm said. "By contrast, hospital stocks might be under pressure, as these companies have been viewed as net winners under reform," the firm added.

Matt Perry, an analyst for Wells Fargo, predicts that Congress will pass a health care reform bill in the next few weeks, but a victory by Scott Brown would increase the chances of nonpassage to 25-30 percent, from the present level of ten percent, Perry said. Democrats still have strategies to pass health care reform even if Brown wins the election, Perry noted.

The executive director of the Deloitte Center for Health Solutions, Mr. Paul Keckley, said the Massachusetts election is an early referendum on the pending health care reform bill, as Scott Brown is promoting a campaign against health care reform, while Martha Coakley supports Kennedy's pro-reform stance.