Health-Care Politics Spark a $40 Billion Wipeout on Wall Street

(Bloomberg) -- A month-long rout in health insurers driven by competing policy proposals in Washington that threaten a long period of uncertainty has wiped out about $40 billion of market value from the largest providers.

The 10 percent sell-off in the S&P 500 Managed Care Index began in late February as progressive Democrats in Congress started to get behind a plan to replace private medical benefits with a government-run single payer system. It worsened this week as the Trump administration renewed its effort to scrap the Affordable Care Act.

To put the magnitude of the sell-off in perspective, consider this: the $40 billion in lost market capitalization for the managed-care gauge exceeds the current individual market values of three out of its five member stocks including WellCare Health Plans Inc., Centene Corp. and Humana Inc. What’s more, the measure doesn’t include CVS Health Corp., which owns Aetna Inc. and Cigna Corp. Both those stocks also plunged by more than 10 percent.

“It’s clearly political,” said Jeff Jonas, a portfolio manager at Gabelli Funds, which owns insurers including UnitedHealth Group Inc. and Anthem Inc. While Democrats’ Medicare proposals “are still very vague about what it actually means and certainly no idea how to pay for it, it’s going to be noise and overhang for an extended period of time. There’s probably a lot of investors who just don’t want to deal with that.”

In addition to debates on “Medicare-for-all” and Obamacare, a Trump administration proposal to limit the legal status of about $29 billion in drug rebates is looming. The public comment period on the measure ends this month, and health insurers “will face meaningful disruption” if the rule is passed, according to Bloomberg Intelligence policy analyst Brian Rye.

“This current of bad headlines” over the past few months has scared off generalist investors, RBC analyst Frank Morgan said by phone. “There’s some hope that in the near term, things will settle back down. We are coming up on the end of the quarter. Any last minute window-dressing that has to occur -- maybe that will help.”

The managed-care sector, which has been the health industry’s most-owned among institutional investors, is arguably more vulnerable now after a long ascent that has propelled stocks higher by 870 percent over the past decade. That compares with 246 percent gain in the S&P 500 during the same time.

“While certainly you’ve had near-term weakness, if you look over longer history, they’ve had a nice fundamental run,” said Greg Woodard, portfolio strategist at Manning & Napier, which manages over $6 billion of equities. That’s “one of the risks you have to look at.”

Nonetheless, like Gabelli’s Jonas, Woodward maintains a positive view on the industry, seeing the weakness as a buying opportunity. “Managed care can continue to take a greater share of the government spend,” he said.

JPMorgan’s Gary Taylor, who’s bullish on the biggest health insurers, said investors’ reluctance to buy into the sector is understandable. His analysis of past three election cycles, suggests “we’re only sort of halfway done” with what would be typical in a presidential election year. He notes that the managed care group has traded at a 20-to-40 percent discount to the S&P 500 in past elections, and it’s now only trading at a 10 percent discount.

Any modest rallies over the next two months are likely to stall in June, once the Democratic debates begin, Taylor said in a telephone interview. If investors can “take a nap for three years, we think there’s really attractive value across the managed care space,” he said. “If we tighten that timeline to the next 18-19 months just to the election, the group is totally a binary call on the election outcome.”

To contact the reporter on this story: Tatiana Darie in New York at tdarie1@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Richard Richtmyer, Dave Liedtka

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