Health-Insurance Stocks Spooked by Democrats' Prescriptions

(Bloomberg) -- Health-insurance stocks were battered last week after progressive Democrats in the House introduced plans to replace private medical benefits with a government-run single payer system.

The rollout of the legislation signals what could be a new period of uncertainty for a sector that has known nothing but steady, substantial gains for several years.

The S&P 500 managed-care index has fallen 5.3 percent through Friday from Feb. 26, when Representative Pramila Jayapal, a Democrat from Seattle, outlined her Medicare-for-all proposal after the market closed. The decline was the most in a three-day period since September 2015. On Monday, the index extended its losses by 4.4 percent, one of the biggest one-day losses since 2015.

Wall Street analysts called the selloff an overreaction to a policy proposal with near-zero chances of becoming law in this Congress. Veda Partners analyst Spencer Perlman dubbed it “an impossible dream.”

Even so, the decline may reveal investors’ fears that shifting political ground could increase scrutiny of managed-care businesses including UnitedHealth Group Inc., Anthem Inc. and CVS Health Corp.’s Aetna insurance business. That could lead to unfamiliar tumult for a group of stocks that’s enjoyed a long ascent even as other corners of the health industry were roiled by political wrangling.

Drugmakers and pharmacy-benefit managers have taken more heat in Washington of late. In 2015, brazen price hikes by now-convicted biotech entrepreneur Martin Shkreli prompted backlash from Hillary Clinton, then running for president. Since then popular anger about costly prescription medications hasn’t waned. Last week, seven drug executives appeared on Capitol Hill for a hearing on rising prices.

The eruption of anger at drug companies driven by the Shkreli scandal and the spotlight on the pricing practices of Valeant Pharmaceuticals, EpiPen maker Mylan NV and others drove biotech stocks to their knees beginning in mid-2015. But even as shares of pharmaceutical makers suffered, the stocks of many health insurers kept right on rising.

Since mid-July 2015, when biotech stocks hit a record high and then cratered after Clinton’s criticism, the managed-care index has climbed roughly 79 percent. The Nasdaq Biotechnology Index, by contrast, is still 13 percent below its peak.

The divergence may reflect how political tension has manifested differently for health insurers than for drugmakers. The insurance industry has been roiled by the fight over repealing the Affordable Care Act, which created insurance markets and mandated that all American purchase coverage. But until recently, few mainstream politicians questioned the basic business of health insurance or advanced policies that would essentially eliminate it.

With Medicare for All embraced by several Democratic presidential candidates and Jayapal’s bill endorsed by more than 100 members of the House Democratic majority, the risks of a reckoning for health insurers appear to be rising.

More than half of adults expressed support Medicare for All in a Kaiser Family Foundation poll in January. That support diminished substantially if they were told it would eliminate private coverage or require higher taxes. Respondents found the idea more attractive if it were framed as a guarantee of health insurance for all that would cut premiums and out-of-pocket costs.

That’s the message that progressives like Jayapal and Representative Alexandria Ocasio-Cortez push when trying to advance Medicare for All. Presidential candidates including Cory Booker, Kirsten Gillibrand, Kamala Harris, Bernie Sanders and Elizabeth Warren have all backed the idea, though they likely have room to moderate their positions after a Democratic primary.

Health insurers are emphasizing the risks. “This bill will hurt patients, consumers, and taxpayers: Americans will pay more, to wait longer, for worse care,” said Kristine Grow, spokeswoman for America’s Health Insurance Plans, which represents insurance providers.

Read more: Goldman says to buy health insurers after an ‘irrational’ slump

In the long run, private insurers may benefit from any new effort to expand health coverage. They already have growing businesses managing health plans for seniors and low-income Americans on behalf of states and the federal government.

“The plans are the primary business partner for the federal government in delivering entitlements to consumers, and that I don’t think that that’s likely to change,” said Dan Mendelson, founder of Avalere Health, which consults for health plans and other medical businesses.

“There is, of course, kind of a broader anticorporate sentiment that is rippling through the Democratic party,” Mendelson said. “I just don’t think that it’s likely that it goes much further than that.”

--With assistance from Tatiana Darie.

To contact the reporter on this story: John Tozzi in New York at jtozzi2@bloomberg.net

To contact the editors responsible for this story: Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett, Mark Schoifet

©2019 Bloomberg L.P.