Investors in Health Care Seem to Bet on Incumbent

By Andrew Ross Sorkin
The New York Times, August 20, 2012

Who is going to win the presidential election?

You might want to ask Mark T. Bertolini. He just bet $5.7 billion on President Obama.

Mr. Bertolini is the chief executive of Aetna, which on Monday agreed to acquire Coventry Health Care, a huge provider of Medicare and Medicaid programs. His $5.7 billion bet makes a lot of sense if you believe that the Affordable Care Act — otherwise known as Obamacare — will not be repealed.

Mitt Romney has pledged to repeal the act “on my first day if elected,” so any gamble that Obamacare stays intact could be fairly described as a wager that President Obama will remain in office.

At a minimum, the stock market, which is an indicator of future earnings, seems to be in disagreement, at least somewhat, with the steady drumbeat of C.E.O.’s and investors who have said that President Obama’s administration, in the words of Daniel Loeb, the outspoken activist hedge fund investor, “is openly hostile to most businesses and unable to articulate or implement policies to spark growth and reduce unemployment.”

Mr. Loeb is a frustrated Obama voter who now backs Mr. Romney.

But take a look at some of his most recent investments in the health care field. In the last quarter, he reported in Securities and Exchange Commission filings, he picked up shares of Aetna, Cigna, Humana, UnitedHealth and WellPoint, among others. All of those companies stand to benefit while Obamacare remains in force; a repeal of the bill could send those shares reeling.

Aetna is not the only company to make a bet on the White House. WellPoint agreed to acquire Amerigroup for $5 billion in July, just a little over a week after the Supreme Court’s decision to uphold the Affordable Care Act. Before that, Cigna paid $3.8 billion for HealthSpring in another bet on the expansion of Medicaid and Medicare.

Companies like Aetna, WellPoint and Cigna have all gravitated to rivals with a foothold in government-sponsored programs because the prevailing view is that margins for private customers are going to steadily erode. According to Aetna on Monday, the acquisition of Coventry will “substantially increase Aetna’s Medicaid footprint, creating more opportunity to participate in the expansion of Medicaid and to pursue high acuity positions as they move into managed care.” Aetna’s revenue from the government will jump to 30 percent from 23 percent.

David Einhorn of Greenlight Capital recently made the contrarian case that companies like Cigna would actually do better if the law were to be repealed, ostensibly because of the margin compression that is likely as a result of the new law.

“While the stocks are already cheap, there is the additional unpriced upside in the possibility that the election changes the political landscape, resulting in a possible modification or repeal of Obamacare,” he wrote in a letter to investors last month.

Still Mr. Einhorn, through smarts or luck, made a big investment in Coventry in the last quarter. With the sale to Aetna, irrespective of his investment thesis, Mr. Einhorn’s firm just made about $72 million.

Although this article suggests that presidential election politics may influence the future of the private health insurance industry, the message is really nonpartisan. No matter who is elected president, there will be a lot on money to be made by investing in private insurers. Regardless of the election outcome, this message is terrible news for the patients in our health care system.