Monday, December 21, 2009

On Today's Rally in Health Insurance Stocks

Health insurance stocks are leading the market higher today.

Shares of insurers Cigna Corp. (CI 37.08, +1.28, +3.58%) and Aetna Inc. (AET 33.94, +1.43, +4.40%) showed major gaines (at 3:26 pm et), helping make health-care the best performing sector among the S&P 500 Index's (SPX 1,113, +10.69, +0.97%) 10 industry groups.

Gregory Nersessian of Credit Suisse raised his price targets on seven insurers based on the healthcare bill that appears likely to come out of the Senate.

"In our opinion, the [bill] is a positive first step toward improving some of the more dysfunctional elements of the health-care system," Nersessian said in a note to clients. "The heavy lifting will come when Congress is forced to slow the rate of medical cost growth through more aggressive payment restrictions and utilization controls down the road."

Some key provisions were added to the bill just before the vote, mostly relating to standards on how much the industry must spend on medical expenses.

The bill calls for large-group carriers to spend at least 85% of their revenue on medical costs, and small-group and individual insurers to spend at least 80%. Insurers would have to rebate any excess to policy holders under the bill. An earlier draft put the threshold, known as the medical cost ratio, at 75% for individual coverage providers.

However, shareholders may want to be a bit cautious in their celebrating. This is now about socialist healthcare and oligopoly controls of industry. The oligopolists (in this case the top management at the healthcare firms), who will achieve their gains on the dead bodies of those whose healthcare provisions are going to be cut, are cold bastards. They aren't going to want to split their take with shareholders.

I predict administrative costs at these healthcare oligopoly firms will skyrocket. The shareholder will be simply an annoyance. These insurers won't be in favor of many medical procedures, but they will be in favor of appendectomies and lobotomies for shareholders.

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