LEX When the US congressional debate on healthcare heated up in June, Barack Obama’s chief of staff said the only non-negotiable point was success. “Everything else is negotiable.” One could have interpreted this statement as bravado or an acknowledgement that the administration’s blueprint might look quite different once 535 members of Congress and countless lobbyists finished with it. The latter is evident in the still-evolving versions of legislation.
For the managed-care companies at the centre of the US’s health system, political horse-trading has sent their shares gyrating. Pressure for legislative “success” this year may produce a bill that leaves them paying punishing fees and insuring riskier patients, but probably not out of business. Even in their worst case, a full public option, the axe might not fall until 2013. But insurers’ shares are pricing in a high probability of disaster. Analysts at Barclays Capital found that the sector’s downside is limited to perhaps 10 to 15 per cent, because the tangible book value and cumulative cash flow from operations until 2013 leave many insurers trading near, or in some cases below, their liquidation value.
Since the beginning of 2008, a group of managed-care stocks in the S&P 500 have lost 52 per cent of their value, or twice as much as the underlying index. The six largest insurers remain the priciest of the bunch, but even they trade at a mere 40 per cent premium to 2013 breakup value. Employer-centric Wellpoint is the priciest and Medicare-dependent Humana the cheapest, reflecting relative risks.
A more realistic scenario is that most insurers survive in some form under Obamacare but see their profitability curtailed. Even if cash flows are cut in half ad infinitum after 2013 and never grow with inflation, the six large insurers still might be one-third undervalued today. The patient is in bad shape but should pull through.
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