The dwindling prospect of a government-run health insurance plan lifted the shares of managed care companies on Monday and relieved investors who feared the companies could not compete with such a plan.
The S&P Managed Health Care index .GSPHMO of large U.S. health insurers was up 3.8 percent, soundly outperforming a 2.5 percent decline for the broader S&P 500 index .SPX, following comments from the Obama administration that creating a public plan was not essential to a healthcare overhaul.
Health and Human Services Secretary Kathleen Sebelius said on Sunday that nonprofit cooperatives could also fulfill the White House goal of creating more competition on insurance. Analysts viewed the co-ops as far less threatening to managed care companies, even as details on them remain unclear.
"This is the best-case scenario," said David Heupel, a portfolio manager with Thrivent Investment Management. It "takes off the table anything really, really onerous for the group, and that's a huge positive."
UnitedHealth Group Inc (UNH.N) shares rose 3.6 percent at mid-afternoon, WellPoint Inc (WLP.N) climbed 3.3 percent, Aetna Inc (AET.N) increased 5.2 percent, and Coventry Health Care (CVH.N) jumped 5.2 percent.
The stocks rallied even as billionaire Warren Buffett's Berkshire Hathaway Inc (BRKa.N) late on Friday reported lower stakes in UnitedHealth and WellPoint, the industry's two biggest companies.
"Investors believe that risk of competition from a government-run plan has declined significantly, and that the co-op option being floated by Democrat legislators will be relatively benign to the HMO industry," analysts at Jefferies & Co said in a research note.
The S&P Managed Health Care index has risen 18 percent so far this year, with strong gains since July as analysts said investors came to think a public plan was unlikely.
But their valuations remain low. As of Friday, the managed care index traded at 8.4 times 2010 earnings estimates compared with 11 times for the S&P Health Care Sector index .GSPA and 13.1 times for the S&P 500.
"The uncertainties of Washington politics make for sleepless nights for even the most convinced healthcare investors," analysts at Leerink Swann said in a research note.
"Now, with a clearer indication than we have seen previously regarding the likelihood of a public plan, we expect investors to begin to narrow the valuation gap between managed care stocks and the rest of the healthcare sector."
Investors feared health insurers would be unable to compete with a government run option, and that such a public plan could be a first step to an entirely government-run health system.
The prospect for a such a plan has sparked intense opposition from Republicans and led to charges that health reform, President Obama's top domestic priority, would amount to a government takeover of healthcare.
"The public plan option is just too contentious right now and it creates a potential roadblock that is insurmountable between the Democrats and Republicans in both houses of Congress," Stifel Nicolaus analyst Thomas Carroll said.
The health reform focus shifted to co-ops, which were proposed by Democratic Senator Kent Conrad. He proposed nonprofit, member-operated regional co-ops to compete with insurers. The co-ops would function as a mutual insurance company where policyholders would have some ownership rights.
Much remains uncertain about the co-ops. A key question is the level of reimbursement to healthcare providers paid by the co-ops, Stifel's Carroll said, which if low could lead to profit margin pressure on private plans.
"It's going to be this competitive factor that causes managed care companies to bring their margins down," Carroll said.
Still, he said, "It's easier to compete with a bunch of non-government run, not-for-profit companies, better than it is to compete with a single large government health plan that is basically setting the rules and operating on its own."
Heupel said the co-op plan does not foreshadow drastic change in the way a public plan did.
"A co-op plan just doesn't hinder or threaten their ability to continue operating the way they do," Heupel said. "It is by far the lesser of two evils for the managed care industry. It's not even close."