Managed-Care Stocks Face Fluid Summer, Given Overhaul Talk

Managed-care stocks likely face a volatile summer as lawmakers work toward a potential overhaul of U.S. healthcare coverage, although the final product is increasingly seen as less disruptive to the industry than some have feared.

While noting that the outlook could change quickly, Wall Street analysts continued to see signs this week that Congress ultimately will produce legislation that leaves health insurers less vulnerable to a profit-busting public health-plan option.

The major managed-care companies have traded flat to down this week, with the Standard & Poor's 500 managed-care subindex down 1.5%, after the group rallied last week on signs of a less severe overhaul.

Stifel Nicolaus analysts, predicting a moderate healthcare revamping will prevail, wrote Friday that they believe the private sector "has averted the worst-case scenario and equities have moved accordingly." Risks remain, however, as certain Democratic leaders seek to push a more partisan plan that's less favorable to the industry, possibly making for "an increasingly contentious summer session that creates investment opportunity around share volatility."

The Congressional Budget Office this week indicated some plans lawmakers are considering would cost less than $1 trillion over 10 years "and are fully paid for," Senate Finance Committee Chairman Max Baucus, D-Mont., said Thursday, voicing confidence in his panel's ability to make progress. He said he will continue to work with lawmakers from both parties to craft a package that can become law this year.

Wachovia analyst Matt Perry, noting that earlier estimates had been higher, said the lower figure indicates the Senate Finance Committee has "downsized their healthcare reform plans." That, and the bipartisan cooperation among the panel's leaders, "could be viewed as positive signs for managed-care companies," he said.

"The lower price tag could indicate that the (committee's) bill will be less ambitious and therefore could leave more of the current health insurance marketplace intact. And the commitment to a bipartisan bill means that a strong public plan is less likely because Republicans oppose it," Perry said.

"Of course, things could change and the Democrats could move further to the left if they are unable to gain Republican support. In that case, they may include a strong public plan in the bill."

Stifel analysts wrote that legislative delays in writing the bill will likely result in less aggressive reform legislation - but a bill nonetheless.

"Members of Congress within both parties and President Obama do not want the electorate to view them as impeding health reform, particularly as 2010 elections lurk on the horizon," the Stifel analysts said.

The firm expects that a health insurance exchange of some form aimed at expanding and subsidizing coverage will be a component of the new healthcare landscape. It also expects a "centrist" public insurance option or an alternative co-op that doesn't use Medicare-based rates or operate as part of the U.S. Department of Health and Human Services. Also expected are employer and individual coverage mandates as well as an expansion of Medicaid.

Meanwhile, Wachovia released a survey of 200 institutional investors this week showing they overwhelmingly believe lawmakers will pass a major health revision this year to cover the majority of the 47 million uninsured Americans, and that they believe health insurers would be the most hurt.

Investors expect generic drugmakers and healthcare information-technology firms will benefit the most, and think diagnostic companies, pharmacy benefits managers and drug distributors would see a modest boost, Wachovia said. Investors expect specialty pharmaceutical companies, biotechnology, device makers and post-acute care facilities to be hurt modestly, the firm said.

-By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; [e-mail]