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Health Insurers Grapple With Reform's Mandates As Supreme Court Date Nears

At Aetna Inc's headquarters in Hartford, Connecticut, about two dozen employees devote all their working hours to one task: making sure the health insurer is up to speed with President Barack Obama's U.S. healthcare overhaul law.

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At Aetna Inc's headquarters in Hartford, Connecticut, about two dozen employees devote all their working hours to one task: making sure the health insurer is up to speed with President Barack Obama's U.S. healthcare overhaul law.

On a part-time basis, more than 1,000 more employees are also working daily on activities tied to the overhaul as the No. 3 U.S. health insurer seeks to comply with the regulations and communicates the changes to its thousands of customers.

In 2010 alone, Aetna says it invested 53,000 work hours -- the equivalent of one person working for 25 years -- updating computer systems to accommodate the new benefits and changes in the law.

"This is touching every different type of business we have," Kay Mooney, Aetna's head of strategic development and product who is helping oversee the company's overhaul efforts, said in an interview. "We need to think about it in all respects."

What if all the work is for naught? That possibility comes into high relief for the healthcare industry starting on Monday, when the U.S. Supreme Court begins hearing arguments about the healthcare overhaul law.

And it has investors and analysts attempting to handicap fallout from the high-profile decision. Shares of large health insurers appear to face little significant downside should the law be entirely tossed out or upheld -- at least in the near term. The major risk lies with a decision that strikes down just the part of the law that requires people to buy coverage.

The court is expected to rule by late June on the law -- Obama's signature domestic policy achievement enacted two years ago that is set to extend health coverage to more than 30 million uninsured Americans. The law is being challenged by 26 states and an independent business group.

At the heart of the court debate is the portion that requires individuals to buy health insurance or pay a penalty. Should the court strike down that requirement, known as the individual mandate, and deem it unseverable from the rest of the law, the entire legislation would be invalidated.

"We will have chaos," said Timothy Jost, a law professor who focuses on healthcare at the Washington and Lee University School of Law in Virginia.

Such chaos may not be bad news for investors in the short term. Many healthcare analysts say shares of large insurers, such as Aetna, UnitedHealth Group Inc and WellPoint Inc stand to immediately jump at least 5 percent should the court strike down the legislation as a whole.

Others see a more modest insurer share rally possible if the law is upheld as a decision will provide more certainty over how the companies will do business. But most agree that a partial ruling that tosses out just the individual mandate could be disastrous for the stocks.

The law's regulations put greater scrutiny on the insurance premium increases that help fuel industry profits. They require insurers to spend at least 80 percent of their premiums on medical costs as opposed to administrative expenses and impose higher fees on their insurance plans in the years ahead.

"The best case is if the whole thing gets thrown out," said Tim Nelson, healthcare analyst with Nuveen Asset Management.

But that sentiment has not been shared by many insurance executives since the law was passed in 2010. Several have expressed their opposition to Republican efforts to repeal the law. If the Supreme Court shoots it down now, the problems of Americans lacking insurance and the country's rising healthcare costs will remain -- possibly forcing government to intervene with far more onerous regulations on the industry in the future.

"What the marketplace needs is some certainty as to where healthcare reform is going," said Robert Laszewski, who consults for health insurers as president of Health Policy and Strategy Associates. "And while the Obama health law is so imperfect and flawed in so many ways, it gave us a target and it said here's where we're going to be for the next 10 or 20 years."

Among other industries, shares of hospital chains, such as HCA Holdings Inc and Tenet Healthcare Inc, are expected to drop steeply should the law be struck down because they would stand to lose millions of insured customers.

Such a ruling is poised to boost shares of medical device manufacturers, such as Boston Scientific, which face taxes on sales of their products under the law.


In an American Bar Association poll of a small group of influential academics, journalists and lawyers who follow the Supreme Court, 85 percent predicted the law would be upheld.

More than 70 percent of 200 investors queried by Goldman Sachs in January also speculated that a decision to uphold the law would be the most likely outcome.

Still, shares of health insurers could rise modestly should the law win backing. Some investors may have held off on the sector until the court's decision provides more certainty.

"If it's status quo, there's probably a rally," said Les Funtleyder, a portfolio manager and healthcare strategist with Miller Tabak. "It's probably also a rally for hospitals too."

The worst-case scenario for health insurers is if the court strikes down the individual mandate but leaves the rest of the law standing. Wall Street experts see this as unlikely.

The law requires insurers to offer coverage regardless of health status, including pre-existing medical conditions. To counter the likely influx of sick, high-cost policyholders, insurers say the individual mandate is necessary to ensure that healthy people are also in the insurance pool.

If only the mandate is struck down, many people may only buy insurance when they become ill, said Justine Handelman, vice president of legislative and regulatory policy for the Blue Cross and Blue Shield Association.

"It's akin to saying you can buy your homeowners insurance when you smell smoke," Handelman said. "That will cause premiums to go up for everyone."

Health insurer stocks would also tumble, possibly more than 5 percent, said David Heupel, senior healthcare analyst at Thrivent Investment Management.

The court is also weighing whether the federal government unconstitutionally forced the states to expand the Medicaid program to millions more low-income Americans under the law.

The expansion could provide an important growth opportunity for some big players like UnitedHealth as well as smaller insurers that specialize in Medicaid, such as Amerigroup , Molina Healthcare and Centene.

"We believe Medicaid's expansion ... is the one that carries a meaningful risk of being overturned," analysts at Jefferies & Co said in a recent research note. "Such a decision would be a meaningful negative for most healthcare service stocks, especially acute care providers and managed Medicaid companies."

Meanwhile, Aetna and other insurers continue to operate as if the law will stay in place -- unless they learn otherwise.

"We have strategies ready for whatever happens over the next 18 months," Mooney said. (Editing by Michele Gershberg; desking by Mark Porter)

Copyright 2010 by Reuters. All rights reserved.

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