INSURANCE

The public option is dead! Long live health insurers!

It sure didn't seem that way yesterday. After the U.S. Senate announced Tuesday evening that it may have reached a compromise eliminating the public option, it was business as usual with health insurers trading like nothing really happened.

For comparison, the S&P 500 was up 0.37%.

A rose by any other name ...

Or this other subhead if you're on the other side of the debate.

Putting lipstick on a pig

It's important to keep in mind that the issue with the public option wasn't what it would do to health insurers now, but what it might morph into. I don't see much change on that front.

The government-sponsored public option may be gone, but the compromise still involves an increasing role for the government in the health insurance industry. First, in lieu of an insurance agency run by the government, the Office of Personnel Management would administer a national insurance plan run by a nonprofit that will be set up by the private sector. It would compete with other insurance offerings on new insurance exchanges.

So, insurers have apparently recaptured the 3 million to 4 million Americans that the Congressional Budget Office estimated would have used a public option. The gains, especially since they'll likely come with low margins, probably won't help them all that much.

Supporters of a single-payer system didn't get that, but they did get one step closer with an expansion of Medicare. As part of the compromise, the Senate's plan will open up Medicare to those Americans from ages 55 to 64, who are unable to get health insurance anywhere else. The insurance companies won't be losing much business here if the early retirees couldn't get insurance anyway and those companies that administer Medicare Advantage might even profit a little from the move.

But the news still isn't good for health insurers, doctors, hospitals, or drugmakers like Pfizer (NYSE: PFE) and Merck (NYSE: MRK). Medicare pays less than private health insurance, which means that private insurance would have to supplement the health-care costs not covered by the government program. Any expansion of Medicare will just increase the amount of money that the companies -- and you and I, through our premiums -- will have to subsidize.

No profits for you

Second, the bigger issue for health insurers could come in the form of a limit on the amount of money they could make. Specifically, the Senate is considering requiring health insurers to pay out 90% of their revenue in medical costs. That would leave only 10% to pay for administrative costs, advertising, and profits.

An increase in the number of insured people should help the companies deal with the lower net margins, but I'm not sure it'll be enough. Ultimately, limiting profits will likely lead to further consolidation of the industry. That is, if the government lets them.

It's not over till it's over

Even if the Senate bill passes in its current form, it's not a guarantee that it'll become law. The House of Representatives' version is considerably different. For instance, it contains a government-sponsored public option and only requires health insurers to use 85% of their revenue to pay for medical costs. Assuming the Senate passes its bill, the conference committee where a compromised bill would be hammered out should be a very interesting place to watch.

Unfortunately for investors, until the bill has President Obama's signature on it, health insurers will continue to trade at the whim of legislator decisions.

Brian Orelli

Source: Fool.com