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"Insurance Stocks Take Beating"

Some managed care stocks stabilized Friday after receiving a thrashing earlier in the week, but analysts warn of more volatile trading days as the federal government considers health care reform.

Several companies saw their share prices tumble 10 percent or more Thursday after President Barack Obama unveiled a proposed budget that includes smaller Medicare Advantage payments to private insurers. That announcement completed a combination punch to the sector, which also saw stocks fall Monday when analysts were surprised by a lower-than-expected increase in Medicare Advantage reimbursement for 2010.

Insurers with relatively large portions of Medicare Advantage business experienced the steepest declines. Shares of Louisville, Ky.-based Humana Inc. fell 42 percent, or nearly $17, from the close of trading Feb. 20 to Thursday. Minnetonka, Minn.-based UnitedHealth Group Inc. stock dropped 28 percent, or nearly $8, to $20.07 during the same span.

Wachovia analyst Matt Perry said in a research note the steep falls were driven by more than just Medicare Advantage announcements. "We'd also add a third factor, which is the realization that President Obama wants to push forward with his national health care reform effort in the near-term and not wait for the economy to improve before tackling the issue," he wrote.

Several health care stocks started the year with a small rally before the last week in February arrived. But Morningstar analyst Matthew Coffina said share price volatility may continue the rest of this year. "There's still a huge amount of uncertainty about exactly what's going to happen, and that's probably not something that's going to be resolved for months if at all this year," he said in an interview.

Medicare Advantage allows the elderly and disabled to enroll in private insurance plans that assume responsibility for covering a participant's health benefits.

The program pays insurers, on average, about 14 percent more than what Medicare spends on its traditional, fee-for-service system. But insurers also generally offer more benefits to their Medicare Advantage customers.

Obama's proposal calls for a Medicare Advantage payment system based on competitive bidding that would lower the reimbursement insurer's receive. That will lead to increased premiums or benefit cuts for people covered by the plans, said Robert Zirkelbach, a spokesman for the trade association America's Health Insurance Plans.

Analysts say the impact on insurance companies is murky, but insurers should still manage some sort of profit, even with the new payment structure. Perry said in his note that managed care stocks were behaving as though Medicare Advantage had been eliminated. He said the sell-off was "divorced from the reality of Medicare earnings contributions." "The sector is likely to be volatile while health care reform is on the front-burner, but managed care companies will be part of the solution to the problem of the uninsured, in our view," he wrote.

Humana shares rose 3 cents to $23.67 in Friday afternoon trading. UnitedHealth shares fell 2 percent, or 42 cents, to $19.65. Other insurance stocks fell more than 3 percent, or slightly ahead of the 2 percent decline from the Standard & Poor's 500 index.


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