Health insurer stocks are poised to rise on Republican gains in November's U.S. congressional election, even as experts taking a longer view see little quick relief from the recent healthcare law.
Polls show Republicans are likely to win control of the House in the Nov. 2 election and at least cut into the Democrats' majority in the Senate.
Since August, when polls showed GOP candidates gaining a clear edge among voters, insurer stocks are already up more than 5 percent against a nearly 2 percent rise for the broad market.
Some analysts said stocks of companies like UnitedHealth Group Inc., WellPoint Inc and Aetna Inc could rise 5 percent to 15 percent over one to two months after the elections, depending on the Republicans' success.
"If Republicans take over, those industries that got hit really hard by this bill obviously stand to benefit from any kind of improvement ... managed care in particular," said Kim Monk, a healthcare analyst for Capital Alpha Partners.
Republicans have vowed to fight what they call "Obamacare," promising to repeal the law, strip it of funds and make other changes to rein in the measure if they take over Congress.
But even if Republicans take over one legislative body, it takes both houses of Congress to make changes and President Barack Obama retains veto power. That makes a repeal of healthcare reform unlikely while he remains in office.
Campaign donation figures show insurers still placing a larger share of their bets on Obama's fellow Democrats.
The legislation championed by Democrats and signed into law by Obama in March aims to eventually expand health insurance coverage to more than 30 million currently uninsured Americans.
It imposes fees and regulations on health insurers, including mandates on how much they spend on medical care and bans to prevent discrimination and lifetime caps, measures seen hurting industry profits.
Several provisions took effect this week, although many do not kick in until 2014.
Democrats have regularly attacked insurers in rallying behind the law. Just this week, two senior Democratic senators warned insurers against blaming the new law for any higher premiums they plan to charge.
So far, Republicans are poised to pick up some 50 seats in November, enough to win control of the House, although the Democrats will probably hold on to the Senate, pollster Cliff Young of Ipsos Public Affairs told the Reuters Washington Summit this week.
But Obama will retain considerable clout.
"The presidential veto — that's the ultimate power here," said Larry Sabato, a political science professor at the University of Virginia. "Health care, that's his legacy. There is no way he's going to let that be undone."
WEIGHING ON STOCKS
Persistent concerns over the political climate and fallout from the reforms has weighed all year on health insurers, overshadowing strong financial results.
The Morgan Stanley Healthcare Payor index of insurers has outperformed the broader market overall this year — rising about 8 percent compared to a 3 percent increase for the S&P 500 index — but the gains could have been greater, industry experts argue.
Valuations remain crimped. Large health insurer stocks trade on average at only 9.2 times next year's earnings estimates — a roughly 20 percent discount to the S&P 500 and 14 percent below the broader S&P Health Care index.
"The political risk is the biggest downside risk that investors perceive in this space," Sanford Bernstein analyst Ana Gupte said. "The fundamentals are doing very well. Had there not been such a hostile Congress and administration, these stocks would be trading at way higher multiples than they are today."
Enough election uncertainty remains that stocks could rise even more if Republicans prove the polls right.
Maria Mendelsberg, a principal with Cambiar Investors, said there has already likely been "some buying, and the day of (the election) or the day after I'm sure you'll see another boost," provided Republicans make gains.
NO SURE BET
But a greater Republican presence in Congress may not be a balm for the stocks over the long-term.
Republicans may seek to erode parts of the bill that are friendly to insurers, such as a requirement for people to have health insurance or face fines.
Insurers, which fought most of the reforms but now vow to follow the law, maintain that requiring people to buy plans is critical if they have to cover all people no matter how sick they are because otherwise costs would skyrocket for everyone.
"If Republicans gain seats in the House and in the Senate, it will be a positive catalyst for managed care stocks in the near term," Stifel Nicolaus analyst Thomas Carroll said. "But longer term, once more Republicans get into office, Republican tinkering of healthcare reform could be a bad thing."
Just as for the 2008 election, most health insurers' campaign contributions are going to Democrats' coffers for the 2010 campaign. As of Aug. 22, HMOs gave $5 million to Democrats and $3.1 million to Republicans, according to the Center for Responsive Politics, an independent group that tracks political spending.
Certainly, Republican gains could slow down the law.
Opponents could stall reform by refusing to fund some longer-term changes, such as state-based insurance exchanges aimed at helping consumers buy plans starting in 2014.
If Republicans control the House, they would take over various committees and could launch probes or haul in various members of the Obama administration to publicly defend the law and its implementation.
"It's going to be hard...to be rolling out these thousands of pages of regulations if (Medicare and Medicaid chief Donald) Berwick and (U.S. Health Secretary Kathleen) Sebelius are up before a House committee once a week testifying," Monk said.
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