By Jon Kamp
Shares of major health insurers were under pressure Thursday
after the U.S. Supreme Court upheld a sweeping health-care overhaul
law that promises to deliver more customers, but also new coverage
requirements and other measures that are expected to pressure
managed-care firms' profits.
Investors built expectations ahead of the ruling that the high
court would eliminate all or part of the law, potentially taking
away measures such as requirements to accept all customers, even if
they are already sick. Instead, the court largely upheld the 2010
law, including the mandate to carry insurance, despite limiting the
government's ability to sanction states that don't go along with a
Medicaid expansion.
"This was a real surprise," said Marshall Gordon, a director and
health-care analyst for Legg Mason Inc.'s (LM) ClearBridge
Advisors. "People were beginning to believe the individual mandate
was going to be struck down" along with other insurance-market
reforms, he said.
Smaller Medicaid-focused insurers such as Amerigroup Corp. (AGP)
all traded up, buoyed by the promise of millions more people added
to the health plan for the poor in coming years. But big,
diversified insurers were generally lower through most of the day,
led by WellPoint Inc.'s (WLP) 5.2% decline.
Aetna Inc. (AET), Cigna Corp. (CI) and Coventry Health Care Inc.
(CVH) also declined.
Two insurers climbed into positive territory late in Thursday's
regular trading session, with Humana Inc. (HUM) managing a 2-cent
gain on the day and UnitedHealth Group Inc. (UNH) rising 0.5%.
Analysts have long said UnitedHealth--the industry's largest firm
by members and revenue--was well-insulated against a negative court
ruling. The company is a big player in commercial, Medicare and
Medicaid markets, and also has a large health-care services
business.
Moody's Investor Services called Thursday's ruling a "credit
negative" event for health insurers, because the law applies
financial pressure through several avenues, and the ratings firm
doesn't think the mandate has enough teeth to compel people to join
the market. Insurance CEOs have raised the same point, arguing the
law could allow people to wait until they are sick to seek
coverage.
Yet insurers have dealt with provisions put in place thus far,
including a requirement that they spend a certain amount of premium
dollars on patient care or refund the difference, Moody's noted.
The government recently announced health insurers will distribute
$1.1 billion in rebates to 12.8 million Americans by Aug. 1 because
of this requirement.
The industry also is lobbying to modify some parts of the law,
such as increasing penalties for people who don't comply with the
mandate. Major provisions in the law, such as the launch of
exchanges where individuals can buy insurance, aren't coming until
2014. The Congressional Budget Office has estimated the law will
expand health-care coverage to around 33 million people by 2022,
mostly through exchanges.
The law is hardly secure, with Republicans vowing repeal heading
into November's elections, but some observers argued the industry
should benefit from having a big question mark removed.
"I think the most important thing that came out of this was
another chapter of clarity," Cigna Chief Executive David Cordani
said on a call with reporters.
Some analysts saw opportunities to capitalize on the post-ruling
slide. Big, diversified insurers "have been gearing up for this
scenario and finally have visibility," Jefferies analysts said. "We
would have expected the diversifieds to trade higher today."
Instead, enthusiasm lifted Medicaid insurers, which are poised
to benefit from the law adding 15 million or so new people,
analysts estimate. This should supplement industry growth from
states steadily seeking managed-care help to run Medicaid programs
and an emerging opportunity to cover high-cost people who also
qualify for Medicare, the program for the elderly. Amerigroup rose
4.9%, Molina Healthcare Inc. (MOH) added 8.6% and WellCare Health
Plans Inc. (WCG) rose 8.8%.
The Medicaid expansion may not come smoothly, because the high
court said the federal government can't put sanctions on states'
existing Medicaid funding if the states decline to go along with
the expansion, but can withhold new funds if the states don't
comply with the requirements. This could open doors for some states
to opt out.
But executives said they don't see roadblocks, and believe
states will still be compelled to get on board. The federal
government will subsidize the whole expansion for the first few
years, starting in 2014, and will cover at least 90% after that.
The federal government and states usually divide Medicaid
costs.
"I think it's more or less intact," said James Carlson,
Amerigroup's chief executive, regarding the Medicaid expansion
opportunity.
As for the overall law, Mr. Carlson was glad to see it stay,
feeling it is better to work on improvements over time than start
over from scratch. "We're glad to have some of this uncertainty
resolved," he said.
Write to Jon Kamp at jon.kamp@dowjones.com