Market Overview

How Will Healthcare Reform Affect Your Investments?

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According to a recent CNN article, approximately 2.5 million more young adults in the United States are now receiving health coverage as a part of President Obama's healthcare reform, the Patient Protection and Affordable Care Act. A part of the reform that became effective in September allows these young adults to stay under their parents insurance through age 26.

As the rest of the provisions slowly take effect, more and more health insurance companies will be affected. The number of subscribers will most likely go up, as everyone will be required to buy health insurance. On the other hand, the health insurance companies might see their profits diminishing, as the new law prevents them from charging higher premiums from clients who have pre-existing conditions. Additionally, the insurers will not be allowed establish spending caps in the future, which may also have an impact on the companies' bottom lines.

How might these changes affect your investments? Benzinga took a look at three health insurance companies that could affected by the Patient Protection and Affordable Care Act:

1. AFLAC (NYSE: AFL)
Market Cap $19.6 Billion
P/E Ratio 10.71x

Aflac is a general business holding company and its principal business is supplemental health and life insurance. The company's shares have been under a heavy pressure this year due to its exposure to Japan and the stock is down 25 percent year-to date. The past three months have shown more positive signals though, as the shares have gained 20 percent.

Any changes to the healthcare law are likely to have a direct impact on Aflac, but it's exposure to Japan is likely to limit the impact.

2. Aetna (NYSE: AET)
Market Cap $14.4 Billion
P/E Ratio 8.39x

Aetna offers a range of traditional and consumer-directed health insurance products and related services, including medical, pharmacy, dental, behavioral health, group life and disability plans. The stock has performed very well this year and is up nearly 30 percent year-to-date.

Aetna also has international operations, so the changes in the American heath care law have a direct, but limited impact on the company.

3. Humana (NYSE: HUM)
Market Cap $14.0 Billion
P/E Ratio 10.92x

Humana provides full-service benefits and wellness solutions, offering an array of health, pharmacy and supplemental benefit products for employer groups, Government benefit programs, and individuals. In 2011, Humana has been strongest perform out of these three health insurance stocks. Its shares are up over 50 percent year-to-date.

Humana does not have international operations. Thus, any major changes in the U.S. health care law will most likely have a significant impact on the company.

Overall, the investors should keep a close eye on the political debate on Patient Protection and Affordable Care Act or “Obamacare,” as any changes or delays in the implementation of the law may affect these insurers. The last provisions of the law are set to become effective in 2014, so the upcoming presidential election is likely to play a key role.

The election of a republican candidate is likely to bring major changes to President Obama's healthcare reform and most of the GOP candidates have stated they would repeal the health care bill. Alternatively, the re-election of President Obama would essentially guarantee that all the changes will become effective as scheduled.

ACTION ITEMS:

Bullish:
Traders who believe that the healthcare bill or “Obamacare” is positive for the health insurers might want to consider the following trades:
  • Go long Aflac, Aetna, Humana, or any other health insurer
  • Go long SPDR S&P Insurance ETF (NYSE: KIE)
  • Also health care providers might benefit. Thus, going long Health Care SPDR ETF (NYSE: XLV) might be a good idea.
Bearish:
Traders who believe that the healthcare bill is negative for the health insurers may consider alternative positions:
  • Short the health insurers when the bill becomes fully effective.
  • Short iShares Dow Jones US Health Care ETF (NYSE: IHF), if you believe that the health care providers will suffer.
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

You can follow me on Twitter @TuomoKallio

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