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Can the stock market predict health-care reform?


The graph above tracks the stock prices of Aetna, Wellpoint and United Healthcare Group over the past five years. Those three companies were chosen because they're large insurers with different business models (Wellpoint focuses more on the individual market than Aetna does) and different politics (Aetna is considered friendlier to reform than Wellpoint). You'll notice, at the rightmost edge of the graph, a small spike for the three insurers as the market reacts to news of health-care reform's likely passage.

Running the numbers, Silver estimates that the market values reform at $16 billion or so for the insurance industry. It's a necessarily uncertain estimate, but Silver's assumptions are fairly generous, so if anything, it's probably a bit high. And although $16 billion is a lot of money, it's peanuts in terms of the total reform package. As Silver says, "Over the course of the next ten years, the Senate's bill directs about $447 billion in public subsidies to people for the purchase of private health insurance. (This is in addition to another $400 billion or so in subsidies for the expansion of Medicaid). The $16 billion in value-added, therefore, represents about 3.6 percent of the subsidy."

I want to make a slightly different point: Look at the graph atop this post. This bill is not, in the market's estimation, a gamechanger for the insurance industry. All of these stocks have seen both larger rises and larger falls in the past. None of them have recovered to their pre-crash highs. The market is not viewing the insurance industry in a dramatically different light than was true a year ago.

This is, at best, back-of-the-envelope work. But so too is divining the true worth of the health-care reform bill by tracking the daily fluctuations in the stock prices of insurers. The market is a confusing beast. Maybe it doesn't understand how awesome the health-care bill really is for the private insurance industry. Maybe it foresees a future in which insurers make more money for a period, and then government continues regulating insurance industry behavior and profits, and insurers are eventually driven out of business or into a new type of business that doesn't allow for much in the way of profits. Maybe it thinks the fallout too uncertain for big bets. It's all hard to say. And it makes this sort of thing a bad way to understand the health bills.

By Ezra Klein  |  December 22, 2009; 4:30 PM ET
Categories:  Health Reform  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: Letters to health-care Santa: Give private options some public power
Next: It was the day before Christmas and all through the Senate ...


Speaking of THE healthcare bill ...

From C-Span: Agreement reached for final passage vote around 8:00 A.M., 12/24/09.

Guess Repubs decided to have some holiday time at home with friends and families, afterall.

Posted by: onewing1 | December 22, 2009 4:48 PM | Report abuse

Please tell me you're kidding with this post, right? Back of the envelope or not, AET has split twice during the time frame, and WLP and UNH have each split once. This graph is truly meaningless. Even your buddy Orszag wouldn't sign off on this amount of graphi-ness.

The point is that the stock market is responding to the Obama administration's requirement that 30 million new customers line up at the insurers' doors with 16-18 month, split-adjusted highs.

Keep spinning, but you and your buddies on Journolist will never convince the left (or right or center) that this bill was anything more than a giveaway to insurers.

Posted by: philly211 | December 22, 2009 5:11 PM | Report abuse


As you know the market went through a major correction from October 2007 to March 2009. Additionally, practically every business felt the impact of the housing bust and credit crisis. So the price graphs may not be very illustrative at all of ascertaining health reform impact.

Finally, while I agree with your statement suggesting caution in reading too much into short-term price fluctuations, they shouldn't be totally ignored either.

Posted by: RandomWalk1 | December 22, 2009 5:17 PM | Report abuse

For those who worry until tears that the 3.5% or so that the insurers will get fromm their much higher incomes (poor dears, those Aetna folks, their kids won't get BMWs for their 16th B.D.).

Here's a comparison: Safeway, and the other food retailers, make about 1-2% net profit on their sales. Are they failing? So, the health insurers should get too many sobs of sympathy. They might have to cut the number of their lobbyists from three per congressperson down to two. Breaks my heart.

Posted by: JimPortlandOR | December 22, 2009 5:37 PM | Report abuse

To the second commenter. the chart is adjusted for stock splits.

Silver's analysis is meaningless because he doesn't understand what is priced into these stocks in relation to HC reform. Ezra - i mostly agree with you when you say "maybe the fallout is too uncertain for big bets".

The stocks were up on Monday after the Senate reached agreement. This wasn't becasue the bill is good for them. In fact it will make their business much more challenging. No, the stocks were up because the market feared an EVEN WORSE bill (and to a lesser degree because short term traders love "catalysts" like the Senate aggreement and see them as opportunities for short term gains). Killing the public plan was a big positive for insurers - less for what the public plan would have been as written and more for removing the fear of the slippery slope to an even stronger public plan in the future. But the death of the public plan was already priced in. If i had to attribute the stock movements to a couple things i'd pick the worry that the minimum loss ratio provisions could have been worse and the relief that the industry "fee" won't be assessed until 2011 (vs. 2010 in the prior Senate bill).

Trust me on this - in general policy wonks do not understand the stock market or the impact of legislation on stock prices (not singling you out Ezra - i think your understanding is more nuanced than most). Just as finance types (like me) don't understand the political process very well. What i will say is that in general finance types make more of an effort to understand policy than policy wonks (and political bbloggers) do to undertand the markets. Although i think the incentives are stronger since policy and politics can impact the market. Wheras the market's reaction is very much an after thought for polict wonks (and Congress).

Anyway, i think it would benefit your blog and others if you read/talked to finance/Wall St types more often. The market can provide a good persepctive.

Posted by: MBP2 | December 22, 2009 6:39 PM | Report abuse

Ezra sez "You'll notice, at the rightmost edge of the graph, a small spike for the three insurers as the market reacts to news of health-care reform's likely passage."

No you won't.

That "small spike" is clearly smaller than much of what is clearly noise in this graph. If the signal is smaller than the noise level, then you don't see a signal. You imagine one.

If it continues to go up for the next few days, maybe you will see something but that is in the future, not today. This business of attributing every little burp and gurgle of the market to whatever was at the top of the day's news is simply economic entrail reading. I expect it from something like Marketplace or CNBC but you should know better. Not every variation is explicable. Most of them are totally random.

Posted by: pj_camp | December 22, 2009 6:54 PM | Report abuse

the OTHER question should be what the profits of the other sectors will be. All of this focus on the EVIL insurers forgets the other 800 lb gorilla in the room, PHARMA. I'm betting Pharma will continue their great run with a sweet deal, espeically biologics.

Posted by: visionbrkr | December 22, 2009 6:58 PM | Report abuse

I can tell you being ABD in finance that predicting the impact of events on stocks is not simple. You have to use statistics, sometimes very advanced statistics, to control for things, things like how well the market as a whole did over that period.

Also, you have to consider how much an event was already expected, and thus already reflected in the stock's price.

If everyone already knew the day before the final vote there was a 99.99% chance of the healthcare bill passing, then the price of the stock would already be almost completely based on it passing. The next day when it actually passed it would have almost zero effect on the stock price.

Posted by: RichardHSerlin | December 23, 2009 1:12 AM | Report abuse

What is this article about? - all you need to do is check the health care stocks when there was a reaction. Going back 5 yrs is silly...

"stock prices in the nation’s largest insurance companies are on the rise following news of a Senate plan to abandon the public insurance option. The Standard & Poor’s Managed Health Care index rose 1.6 percent Wednesday, compared to a 0.6 percent drop for the broader index of 500 companies."

Ezra and Nate are boy-wonders gone completely wrong on this debate. They are both making mistakes, and grabbing at straws to defend them. I actually no longer even read Ezra, but just checked in to see if there was any response to the latest criticisms from firedoglake, et al. - but this stock chart is what I found.

Posted by: lucky9 | December 23, 2009 11:15 AM | Report abuse

Here's more on this from Greenwald:

Posted by: lucky9 | December 23, 2009 1:13 PM | Report abuse

Thank you for the clarity. The graph really puts it in perspective.

Posted by: clampson | December 23, 2009 2:48 PM | Report abuse

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