Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

WellPoint, Inc. (WLP), UnitedHealth Group Inc. (UNH), Aetna Inc. (AET), & CIGNA Corporation (CI): Is Obama’s Home State Balking at Obamacare?

The first full week in June ended with Illinois lawmakers again failing to send Gov. Pat Quinn a bill outlining a state-run marketplace to sell health insurance in accordance with the Affordable Care Act, more commonly known as Obamacare. While the marketplace will still open for business later this fall, the control of the marketplace for Illinois residents is the issue in question. The governor wishes to partner with the federal government for 2014, but he had hoped that the state would take control for 2015 and beyond. If some resolution isn’t reached quickly, control will probably remain in federal hands for quite some time.

Given the interplay between federal- and state-run marketplaces, it’s unclear what impact this development — and those like it in other states — will have on the major health-insurance providers, but most have already made clear that they’ll enter a limited number of markets. That outcome could ultimately mean that states relying on the centralized federal option will be able to offer more choices, simply because the insurance companies aren’t racing to join state systems. When these markets go live in October, the participation of the major players will probably have a significant impact on the respective stocks.

WellPoint, Inc. (NYSE:WLP)

The position of the companies
According to a recent story from Reuters, the largest insurance companies have been cagey about their interest in becoming deeply involved with Obamacare marketplaces. Here’s a summary.

  • WellPoint, Inc. (NYSE:WLP) : The insurer that runs 14 Blue Cross Blue Shield state operations said it will join in those states, but it has no specific plans to extend its reach into new markets.
  • UnitedHealth Group Inc. (NYSE:UNH) : The country’s largest insurer has remained especially vague on the number of systems in would participate in — placing the number somewhere between 10 and 25. Interestingly, the company is not likely to participate in its home state of Minnesota, because for-profit insurers are not permitted there. Minnesota offers an example of how each of the different states poses unique issues.
  • Aetna Inc. (NYSE:AET) : The insurer reported submitting 14 applications, but like WellPoint, Inc. (NYSE:WLP), it said it had no plans to use the exchanges as a vehicle for expansion or a “land grab.”
  • CIGNA Corporation (NYSE:CI) : Fourteen seems to be the magic number for applications, as this insurer also reports that it will be involved in that many states. While CIGNA Corporation (NYSE:CI) is also trading near its own 52-week high, the stock offers a dividend yield of only 0.10%. Given the significant run the overall market has experienced, the downside protection from other options is preferable.

Central to the concerns of all of these companies is ongoing uncertainty over how many plans they’ll be allowed to offer, what pricing parameters may be placed on pricing and benefits, and what costs may be involved in participating in various systems. The appeal for the states of creating their own exchanges is that they’ll then be able to set more of the rules that the insurers must abide by and honor.

While the government believes that the exchanges offer the appeal of lower administrative cost to the companies, the limitations are hard to fully predict until the systems go live. One obvious issue for the system is that states that currently have very limited offerings may not see any significant uptick in options. While an obvious solution would seem to include offering all options of the federally run site to residents of all states that participate therein, the regulations and limitations that govern the industry would mean another major overhaul to the law to allow that situation to occur.

The Illinois situation
The wrangling afoot in Illinois seems to be typical of many states, including those seen to be the most supportive of President Obama. The battle lines in the Illinois State Legislature are being drawn between those who want a state-run system and the influence of the insurance companies. Illinois has already passed another important part of the law, in the form of an expansion of Medicaid to cover the bulk of low-income individuals without insurance; the U.S. Supreme Court made the option in an earlier decision. Ultimately the path of Illinois is more symbolic than critical to Obamacare, but it will probably continue to get attention, since it’s the president’s home state.

The investment impact
The health-care industry as a whole has performed strongly this year, with each of the aforementioned companies outperforming the S&P 500 year to date.

WellPoint, Inc. (WLP), UnitedHealth Group Inc. (UNH), Aetna Inc. (AET), & CIGNA Corporation (CI): Is Obama's Home State Balking at Obamacare?Source: YCharts.

WellPoint, Inc. (NYSE:WLP) is up about 30% and is trading just below its 52-week high, suggesting that the market has little concern over the company’s stance toward the new law. UnitedHealth Group Inc. (NYSE:UNH) offers a similar dividend yield at 1.8% but has been the laggard of the group thus far this year. While U.S. Treasury rates have increased somewhat, the 1.9% dividend yield is still an attractive sweetener for either of these stocks.

Aetna Inc. (NYSE:AET), which is also up about 30% this year, is pushing its own model of care, called Patient-Centered Medical Homes. Under the model, a team of physicians is more actively involved with patients to take a proactive approach and better address ongoing needs. The approach seems to have potential and could give Aetna Inc. (NYSE:AET) an alternative edge.

While CIGNA Corporation (NYSE:CI) is the second best performing stock of the group, it offers a dividend yield of only 0.10%. It’s also the most expensive on a price-to-earnings basis, trading near 15.5, while its peers are all below 13, and as low as 9.3 for WellPoint, Inc. (NYSE:WLP). Given the significant run the overall market has experienced, the downside protection offered by other options is preferable to CIGNA Corporation (NYSE:CI).

Generally, while health insurers have been strong this year, the real success of Obamacare in driving new customers to each of these companies will probably drive performance later in the year. The interplay between federal and state control could ultimately prove costly to these companies, but until the first deadlines passes, shifts may occur that change the landscape. Critical factors to watch will include the number of new policies generated by the law and the relative profitability — should a disparity exist — between state- and federal-run exchanges.

The article Is Obama’s Home State Balking at Obamacare? originally appeared on Fool.com.

Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool recommends UnitedHealth Group Inc. (NYSE:UNH) and WellPoint and owns shares of WellPoint, Inc. (NYSE:WLP).

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.