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Shares of health insurers surged Thursday after the U.S. Supreme Court's hearings on the federal health-care overhaul law raised hopes for a ruling that helps the industry more than it hurts.
The three-day event left plenty of doubt about whether the court--which is expected to issue its decision in late June--will uphold or strike down the mandate to carry insurance. But insurance analysts and investors now see lower odds the court will eject just the individual mandate, which insurers have argued would cause premiums to soar because people could wait to buy coverage only when they are sick.
"The worst case may be off the table" for health insurers, said Les Funtleyder, portfolio manager for the Miller Tabak Health Care Transformation Fund. The fund holds shares of Aetna Inc. (AET), UnitedHealth Group Inc. (UNH) and Humana Inc. (HUM).
Aetna led the way among rising managed-care firms, up 6.8% to $49.69 in recent trading, while reaching the highest point in four years. Likewise, UnitedHealth, the industry's biggest company by revenue and membership, also hit a four-year high while rising 4.7% to $58.05 in recent trading.
Humana, WellPoint Inc. (WLP), Cigna Corp. (CI) Coventry Health Care Inc. (CVH) and Health Net Inc. (HNT) also rose, defying a downturn in the broader stock market.
The crux of the Supreme Court case involves the constitutionality of the mandate to buy insurance. The other key issues in debate include whether the rest of the law should stand if the mandate doesn't and whether the Medicaid insurance program for the poor can expand as the law envisions.
Sanford Bernstein analyst Ana Gupte believes the court is most likely to strike down the individual mandate but also "the onerous underwriting provisions" that require insurers to cover people no matter their health, and that policy rates can't vary based on health. The analyst called this "the best scenario for insurers."
The analyst is a former Aetna employee, and she and a household member hold long positions in Aetna and Cigna equities, according to her firm's disclosures.
BMO Capital analyst Dave Shove thinks the court will strike down the mandate while severing it from the rest of the law. But he doesn't see this as a big problem for insurers because it would force Congress to rework the law.
While analysts see benefits for big insurers if the entire law is struck down, such a move would hurt Medicaid-focused insurers that stand to benefit from the law's aim to add 17 million people to the health plan for the poor. Likewise, the current law also helps hospitals because more people gain health coverage, and that could mean more patient traffic and fewer cases where people can't pay their bills.
The law is "flat-out positive" for hospitals and Medicaid companies, fund manager Funtleyder said.
Shares of Medicaid insurers Centene Corp. (CNC), Amerigroup Corp. (AGP) and Molina Healthcare Inc. (MOH) were lower Thursday, while stocks for big hospital firms such as HCA Holdings Inc. (HCA) moved up after declining the prior two days.
In the wake of the court hearings, Susquehanna analyst Chris Rigg said he was "more bullish on the diversified HMOs" but "more cautious on the Medicaid HMOs" and hospitals.
-By Jon Kamp, Dow Jones Newswires; 617-654-6728; firstname.lastname@example.org