A registered nurse injects a dose of the H1N1 flu vaccine at a Toronto health clinic on Thursday, October 29, 2009Darren Calabrese
Shares of Medicaid insurers, hospital companies and even drug makers rose on Monday as many investors concluded that passage of landmark U.S. health care legislation will add millions of new paying patients.
The S&P Health Care Sector index was up nearly 1 per cent Monday, outpacing the broader market, after the House of Representatives gave final approval to a sweeping overhaul late on Sunday night.
Shares of hospital companies such as Community Health Systems and health insurers such as Amerigroup that focus on Medicaid plans for the poor led the increases. Analysts expect those companies to benefit as the reform package extends coverage to 32 million Americans.
Robert Schaeffer, portfolio manager with Becker Capital Management, noted that health insurance companies had been on the rise prior to Sunday's reform bill vote, foreshadowing a positive take by investors.
"It's obviously been perceived by the market, which is more often right than economists and politicians, but I think the changes have basically been perceived as generally positive," Mr. Schaeffer said.
"The last few weeks we've noted for example that the HMOs - the Wellpoints and Aetnas of the world - have been doing quite well," Mr. Schaeffer said. "I think that's probably an anticipation that, while there are some negatives, there's still a universe of 33 or 34 million people that at some point of time are going to go under some form of insurance platform."
The overhaul will expand the Medicaid government health plan for the poor and bar insurance practices such as refusing to cover people with pre-existing medical conditions.
Shares of health insurers - the prime political target of reformers during the lengthy debate - built on a rally from the end of last week. Investors were heartened that the uncertainty was cleared from the market and that sector companies avoided a worst-case scenario, such as the creation of a government-run competitor.
The Morgan Stanley Healthcare Payor index initially rose 1.9 per cent but gave back some of those gains and was up 0.7 per cent in late morning trading.
Large insurers WellPoint Inc. and UnitedHealth Grou shed early gains, with UnitedHealth down nearly 2 per cent at midday. Medicaid-focused insurers such as Amerigroup and Molina Healthcare climbed sharply, as the companies stand to benefit from an expansion of the program. Molina shares were up 5 per cent.
The cost of protecting U.S. health insurers' debt with credit default swaps rose.
Five-year credit default swaps on Aetna Inc. rose to 110.5 basis points from 97.5 basis points at Friday's close, while Cigna Corp's credit default swaps rose to 120 basis points from 110 basis points on Friday, according to data from CMA DataVision.
Shares of hospital companies Community Health Systems and Tenet Healthcare rose 4 per cent and 7.7 per cent, respectively. The overhaul has been seen as helping hospital companies by adding more insured customers, thereby decreasing the numbers of patients who used services without being able to pay for them.
The NYSE Arca Pharmaceutical index was up nearly 1 per cent, with Pfizer Inc. and Merck each rising almost 2 per cent each. Drug companies face new fees, but wider insurance coverage could help offset the costs by delivering new customers willing to fill costly prescriptions.
Similarly, the NYSE Arca Biotech Index was up 1 per cent.
"We continue to believe money will rotate back into health care stocks now that the uncertainty of 'reform' is lifted," Citigroup analyst Charles Boorady said in a research note.
The S&P Health Care Equipment Sub-Industry index of medical device companies rose 1.6 per cent. Such companies, including Medtronic and Boston Scientific face an industry tax, but it was cut in half to $20-billion and will not start until 2013.