Health Insurers Face Tough Second Half as Policy Risks Loom

(Bloomberg) -- Managed-care investors hoping for a sustained rebound after the sector's worst first-half performance in a nearly a decade are probably going to have to wait a bit longer.

Last week's face-off among candidates in the Democratic presidential primary have set the tone for a health-care debate that's only expected to heat up throughout the year, weighing on insurer stocks. What's more, an appeals court decision on the Affordable Care Act later this year promises even more volatility for a sector that's seen nothing but steady earnings growth over years.

“It's all about timing,” Evercore analyst Michael Newshel said in a telephone interview. “You have these two very low-probability, but very negative events ... that almost all investors think have a close to zero probability of actually happening but the time to get clarity on that is still quite extended. Time is the main issue here.”

Despite some momentum over the past two months, shares of U.S. health insurance stocks are still in the red for the year. The S&P 500 Managed Care Index declined 0.6% through the first half of the year, its worst first-half performance since the Affordable Care Act was signed into law in 2010, according to data compiled by Bloomberg.

Investors' biggest concern remains “Medicare-for-All,” a proposal for universal health coverage which, in some versions, would do away with private insurance. Despite leading Democratic candidate Joe Biden leaning toward more moderate approaches, heated debate exchanges last week pushed presidential hopefuls Kamala Harris and Elizabeth Warren higher on investors' radars. Both support versions of a national health-insurance program.

Biden's challenging position may “undercut his sole front-runner status which could make investors nervous,”' Raymond James policy analyst Ed Mills wrote last week, adding that the party's division on Medicare-for-All should, nonetheless, be viewed as “a clear positive for managed care and provider names.”

While former Vice President Biden has maintained his lead in the polls, Goldman Sachs analyst Asad Haider notes that a stronger consensus on 2020 front-runners may be needed for health insurance stocks to break above their recent trading range. Managed-care shares missed out on a market rally Monday, falling for a second day.

Investors' focus now turns to the next round of Democratic debates at the end of this month, “which inconveniently follow what's expected to be another set of decent earnings” from health insurers, Haider notes. Debates are scheduled to go on until late December, after which voters will start casting their votes during the first primaries and caucuses in February.

Amid a noisy political environment, a decision from the Fifth Circuit Court of Appeals later this year could make matters even worse. The court is set to hear arguments on July 9, according to Evercore's Newshel, and could issue an opinion as soon as early fall. Analysts have previously warned, however, that the case may go up to the Supreme Court, which could deliver a decision right ahead of the presidential elections in 2020.

“We still believe the merits of the case are poor and ultimately, we think the risk here for stocks is the timing of resolution, not the outcome,” Newshel wrote in a recent note. “We remain confident the Supreme Court would uphold the ACA.”

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, Morwenna Coniam, Richard Richtmyer

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