Stock Market Underestimating Obamacare Risks

Wednesday, 04 Dec 2013 07:20 AM

By Michael Carr

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Health insurance stocks, as a group, are up more than 150 percent since the Affordable Care Act became law. This is almost twice as much as the Standard & Poor's 500, which has gained about 85 percent over that same time.

Investors seem to believe that an increased number of customers will be good for insurers. Unfortunately the government has demonstrated they will arbitrarily change the rules, and that could hurt insurance companies in the long run.

For now, insurers are scrambling to adapt to changes in the health insurance market. Recently, President Obama asked them to lose money by extending policies that were priced a year ago for a different set of market conditions.

Editor's Note: ObamaCare Is Here. Are You Prepared?

They are also receiving incomplete and inaccurate information from applications submitted through exchanges and are being forced to spend time and money solving those problems.

Consumers are also losers under the Affordable Care Act with many finding higher premiums and out-of-pocket expenses. This could lead some to accept the penalty for being uninsured and result in fewer enrollments than insurers expected.

Stocks of health insurance companies are trading at levels that seem to be attractive. The price-earnings ratio of the group is about 14, which is below the market average of 16.

Insurers are expected to deliver below-average earnings growth and estimated earnings are based on optimistic assumptions about the health insurance market. Until the rules are firmly set for the industry, health insurance stocks should be avoided.

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