Insurance stocks jump on latest Obamacare news
(MoneyWatch) Healthcare stocks jumped on news that President Obama was allowing insurers to reinstate cancelled policies that did not meet the mandates of the new healthcare law, popularly dubbed Obamacare. CBS News estimates that more than 4.8 million individual health care policies have been cancelled because they do not include a variety of coverages, including maternity, mental health and pediatric dentistry, which are mandated by the new law.
Obama, who famously promised that no one who liked their policy would have to change it, Thursday bowed to pressure from both consumers and legislators that he keep that promise -- at least for this year. In a televised announcement, he said he would allow insurers to maintain their non-conforming policies through 2014, giving them the ability to contact cancelled customers with a reinstatement.
However, analysts said it was too early to say whether Obama's move would prove helpful or harmful to individual companies for a variety of reasons. First, insurers would have to apply to reinstate their cancelled customers and it's not clear whether they will go through that process if the reinstatement can only last for only a year.Health stocks jumped on the news. Aetna (
Additionally, in a market where everyone is (at least theoretically) forced to buy insurance, the health insurance marketplace becomes a zero-sum game. If one insurer is able to reinstate a policyholder, that's a policyholder that's lost to another insurer. And, in this case, the alchemy is even more complex because some insurers that cancelled policyholders are offering different policies through the new health insurance exchanges. Since the new policies offered on the exchanges are more comprehensive than the cancelled policies, they're also more expensive.
Sarah James, healthcare analyst with Wedbush Securities, says there's some concern that healthy policyholders will consequently keep their old, cheaper policies, leaving only the sick to buy insurance through the exchanges. That could make policies offered through the exchanges highly risky and unprofitable for the insurers participating, she says.
On the bright side, the government acknowledged this risk and says it is looking at providing subsidies to the companies on the exchanges, she says. But the subsidy levels have not yet been established. If they're set high enough, insurers with a heavy concentration of new customers coming from the exchanges will benefit. If the subsidy is too low, however, they'll suffer with losses until they can adjust their prices.
"At the moment, this appears to be a net positive for insurers," says James. "But it's going to depend on how this is implemented."
Still, the cancelled policies account for only a sliver of the overall market, says Vishnu Lekraj, insurance analyst with Morningstar in Chicago. He believes the impact on major insurers will be negligible.
The market for health insurance stocks is likely to remain volatile for as long as questions remain about Obamacare, says James. In reality, many important details of how the law will work are just not clear and the political furor surrounding the law remains so volatile that anything could happen,
"Every couple of hours, something changes," she says.