As has become all too characteristic of arguments from liberal skeptics of the Democrats’ health care plan, analyses of the recent increase in share prices of major publicly-traded health care stocks have been misleading.
As we and other analysts have documented, share prices have reacted strongly and unambiguously to news that a public option might or might be part of the Democrats’ health care reform plans. This is in line with a report issued in November from Goldman Sachs, which estimated that a health care plan passed with a robust public option — their so called “bear” case — should result in a 36 percent drop in the prices of publicly-traded health insurance stocks.
The stock market’s reaction to the declining prospects for the public option, however, should not be conflated with its reaction to the anticipated passage of the the public option-less reform proposal currently before the Senate. The same Goldman Sachs report, for instance, projected that a “base” case plan modeled on that adopted by the Senate Finance Committee should result in a slight, 4 percent drop in stock prices. (The plan the Senate is currently considering is somewhat more liberal than that adopted by the Finance Committee, although not necessarily in way that would deterministically affect private insurers.)
In other words, the run-up in share prices in recent weeks reflects investor expectations about the “death” of the public option far more than it reflects investor excitement about the Senate’s current plan vis-à-vis the status quo. How do we know this? Because the behavior of share prices since market close on Friday provides for a pretty decent controlled experiment. The public option was already “dead” as of Friday, and indeed had been “dead” since at least early last week. Since close of business on Friday, however, the prospects for public option-less reform have dramatically improved, principally because of the news on Saturday morning that Ben Nelson would vote with his fellow Democrats against a Republican filibuster.
And since the markets re-opened yesterday morning, their reaction to the news has been fairly mild. As of 11:00 AM EST on Tuesday, the share prices for the six largest publicly-traded insurers, weighted by their market capitalization, had increased by 3.2 percent since their Friday afternoon close. Meanwhile, the S&P 500 benchmark had increased by 1.3 percent over the same period. Therefore, the health insurer stocks have overperformed the market by slightly less than 2 percent.
For some people, any amount of additional profit accruing to private insurance companies is unacceptable. And no doubt, the insurers and their equityholders were pleased that the public option, which would have adversely affected industry profits, was killed. This does not mean, however, that the plan currently under consideration is a “giveaway” or a “bailout” to the private insurance industry. In contrast, the market’s reaction to this plan has been largely indifferent, and the increase in valuation is dwarfed by the magnitude of public subsidies that would be provided to disadvantaged people under the program.