I’m a little late on this, but had to share the latest evidence that investors in private health insurance companies feel they prevailed in their lobbying efforts over the Democratic health care bill. Here’s what happened after the Senate voted to break the Republican filibuster on Monday, according to the AP:
Shares of Aetna rose $1.81, or 5.6 percent, to $34.32; Cigna gained $2.15, or 6 percent, to $37.95; Humana added $1.71, or 3.9 percent, to $45.24; UnitedHealth traded up $1.35, or 4.3 percent, to $32.89; Wellpoint Inc. jumped $2.19, or 3.8 percent, to $60.51. All hit 52-week highs, except for Humana, which was a little more than a dime short of its 12-month high.
Some have been citing this news as proof that the Senate health reform bill is a giveaway to the insurance industry, but passing judgement on the health care bill solely by looking at health insurance stock prices is not fair. Yes, the industry stands to gain some 30 million new customers thanks to new federal requirements that Americans buy coverage. Yes, much of this coverage would be purchased with the help of federal dollars in the form of subsidies for Americans earning up to 400 % of the federal poverty line. But to say that the Democratic Senate health reform bill is nothing more than a boon to private insurers is a gross over-simplification.
First of all, the stock market is volatile and this is a piece of legislation that would be implemented over decades, so looking at a one-day or one-week bump in stock prices as evidence of anything is pretty dicey. But more importantly, the Senate bill would fundamentally transform the way the health insurance industry works. The coverage business, for example, now operates on the principle of underwriting – figuring out how much individual customers might incur in health costs and setting premiums rates accordingly. This whole practice of basing prices on health status would end under reform. Now throw in the end to pre-existing condition exclusions and rescissions. Now consider that insurers will be required to sell coverage to everyone. The health insurance industry will be turned on its head. Investors in health insurance companies believe the transformation will mean more business. Senate bill supporters know this but they also believe that the insurance industry transformation will benefit consumers. These two effects are not mutually exclusive.
Here’s what Nate Silver wrote in reaction to the stock bump, explaining that the most significant impact of the Senate bill on the insurance industry is more customers, not higher profit margins:
The bottom line is that, by the stock market’s estimation, the private health care industry appears as though it will benefit if the Senate enacts its plan. But the benefit — about $16 billion in discounted cashflows — is small as compared to the total magnitude of the program, and likely reflects an increase in the size of their customer base rather than any anticipation of higher profit margins.