Health insurance stocks sank deeper than the broader market Wednesday after President Barack Obama's re-election helped clarify the future of his health care overhaul, a sweeping law that some investors fear will pinch profits in the coming years.
The overhaul aims to cover millions of uninsured people. While that means new business for insurers, the law also imposes fees and coverage restrictions on the sector.
Starting in 2014, insurers will have to pay annual fees that total $8 billion that year and then climb to top $14 billion by 2018. The law restricts how much insurers can vary their pricing based on factors such as age and health—key tools they use to ensure that they have enough to cover medical claims.
It also stipulates, among other things, that insurers spend certain percentages of the premiums they collect on care, or pay rebates to customers.
Insurers like Indianapolis-based WellPoint Inc., with large portions of their business in the individual and small employer group markets, are expected to be affected the most by the fees and restrictions.
WellPoint's third-quarter earnings trumped Wall Street expectations, but the health insurer's stock tumbled after the election. Shares of WellPoint dropped 5.5 percent, or $3.35, to close at $57.85 Wednesday. Share were down 1.6 percent Thursday morning, to $56.91.
Investors also worry about online exchanges that will be set up as part of the overhaul to help people compare and buy insurance policies. Morningstar analyst Matt Coffina cites concerns that these exchanges will take customers from the more-profitable employer-sponsored coverage market.
The overhaul also cuts funding for Medicare Advantage plans, which are privately run versions of the government's Medicare program for the elderly and disabled. That could pressure profits for companies like Humana Inc., for which Medicare Advantage plans make up a large concentration of its business.
Other health insurers saw their stock drop Wednesday. Humana's stock sank 7.5 percent, or $5.75, to $70.41 per share. Shares of UnitedHealth Group Inc., the nation's largest insurer, dropped 3.5 percent, or $1.99, to $54.40. Aetna Inc. fell 3.6 percent, or $1.61, to $42.95.
The Standard & Poor's 500 index, meanwhile, was down about 2 percent.
Cigna Corp.'s stock dropped only 21 cents, to $53.12. Analysts see Cigna as being less vulnerable to reform, since it has a broader business portfolio than most of its competitors. That includes a growing international business.