The Obamacare Overhang

 | Jan 14, 2014 | 5:30 PM EST  | Comments
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Stock quotes in this article:

wlp

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unh

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hum

The "Washington won't screw it up" story is now well digested. And despite Monday's downdraft, Jim Cramer's so bullish he's sounding increasingly like my former Prudential colleague, Ralph Acampora, of mid-1990s "Dow 7,000" fame. What's an investor to do? No offense to Jim, but it's probably as good a time as any to look for stocks that could lose luster if both market trends and our Capitol friends negatively invade sentiment.

A particularly fitting set of story candidates may relate to the troubled rollout of the Affordable Care Act (ACA), or Obamacare, and affected managed-care companies and Medicaid HMOs. 

My partner, Kim Monk, and I continue to cast a wary eye on the ACA and its progeny, Obamacare. We believe there is a disconnect in the way the markets may be looking at ACA-leveraged managed-care companies like WellPoint (WLP) vs. those that are less so, or face pressures from Medicare Advantage instead, for instance, UnitedHealth (UNH) and Humana (HUM). All of the names sold off a bit amid negative November and December ACA-related headlines, but WLP has otherwise managed to end up flat while UNH and HUM have recently lost ground. All this amid the Obama administration's more positive spin of Healthcare.gov and ACA enrollment numbers.

If enrollment doesn't turn out as rosy as Health and Human Services says or gets worse, 2015 rates could herald a judgment on the law as these companies are faced with the choice of jacking up rates at the risk of further deterring young people from signing up, or reducing exposure to Obamacare altogether by serving only the private-sector-employer market. Running away from Obamacare is probably not a viable option for WLP, which is the largest player in the individual insurance market. 

It remains to be seen whether the administration might ease rules to let the most exposed insurers transfer beneficiaries' coverage to private plans. Moreover, the individual market (affecting 15 million people) is still only a tenth of the total, which is dominated by employer-provided plans. Finally, each company has a broad range of businesses, so the negative effects of a worst-case outcome might be hard to assess. Nevertheless, we think there is more bad news ahead for Obamacare, and that the insurers most exposed to it are likely to be more at risk.

How will we know the program's taking on water? Drawing a parallel to director James Cameron's incredibly clinical depiction of how the RMS Titanic sank, with a model showing the initial break and then chamber after chamber filling with water before the ship finally broke in half and submerged, here's the sequence of events that might lead to the Obamacare death spiral the bears are warning about.

  • As Congress returns, House Republicans, in hearings, are primed to highlight victims who have fallen through the cracks, as well as data and transparency issues. Any data-breach stories could be incendiary. 
  • Though steadily improving enrollment could shield the program from open enrollment extensions, more federally condoned (and industry-harmful) delays are still possible amid the risk-averse backdrop of the mid-term Congressional elections. A focus on delaying the individual mandate will also persist, particularly as tax season nears. A delay in the mandate would be like root canal to insurers, who have based their pricing on robust enrollments.
  • Coming next will be a spring focus on whether the exchange risk-pools have enrolled enough healthy people, sparking or dousing concerns regarding risk-pool death spirals, 2015 rate spikes, or talk of plan bailouts.
  • Then comes the potentially tumultuous fall implementation of the employer mandate. Though the administration delayed the open enrollment period for employers (creating a fairness issue, as others weren't similarly given relief), companies will start receiving their renewal and cancellation notices in October, sparking anger ahead of the elections. 
  • Should Republicans retake the Senate (a 40% prospect, in our view), the message from Washington might be even more of a slow-go on the ACA, although the law won't be repealed. How could this end well for the Blues and WellPoint?
  • Meanwhile, despite nervousness among in-cycle Democrats, any changes will likely be implemented by regulatory agencies, rather than legislated. All while the managed-care industry, particularly those most tethered to the fate of ACA, seem more likely to get an anvil than a safety raft if things start to sink.

As a policy analyst, I am not suggesting a WLP short. But from a Washington perspective, increased vigilance, or paired trades or other strategies linking the more at risk with the relatively less exposed, might make sense.

Facing less relative risk, meanwhile, could be the Medicaid HMOs, including Molina Healthcare (MOH) and Centene (CNC). These companies have been on a steady recovery since being roiled by the Supreme Court's 2012 decision to preserve the Affordable Care Act's individual mandate but restrict the feds' ability to force states to provide enhanced Medicaid coverage. The key appears to be that those states participating are highly unlikely to drop out from here; meanwhile, if Obamacare stabilizes and proves successful after all, the industry's "Blue Stock" patina (or leveraging to Democratic election prospects this fall) could even become a wash to a positive.

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