Romneycare vs. Obamacare: Insurance Companies Win Either Way

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Insurance companies would love to see a Mitt Romney victory in November that would result in the arrival of "Romneycare."

But they'd be equally happy if President Barack Obama is re-elected and his Affordable Care Act remains the law of the land.

In short, the insurance companies will profit either way and are planning accordingly.

But how is this possible?

By extending insurance to millions of people previously without coverage Obamacare will provide insurance companies with millions of new customers, a development that clearly will boost their bottom lines.

Romney has promised to dismantle Obamacare and replace it with his own "Romneycare," but don't mistake this new version for the comprehensive reform plan he signed into law as governor of Massachusetts in 2006.

Romney says his new plan would free up the healthcare markets to increase competition and drive down costs.

But this new incarnation of Romneycare — perhaps more accurately described as Romneycare 2.0 — is unlikely to contain healthcare costs and almost certainly will deliver fatter profits to private insurance companies.

"Under [Obamacare] reform, you get market expansion, and that's a good thing" for health companies, Dan Mendelson, the chief executive of Avalere Health, a consultancy told The Wall Street Journal.

"Under Romney, it's going to be like managed-care city," he said.

One thing is clear, however — neither Obamacare nor Romneycare can stop Americans from getting older and swelling the rolls of government medical plans.

And that will spell huge profits for the companies who manage government programs.

Here's why…

Romneycare Taps Free Market Incentives

Romney says Obamacare gives government too much control over the healthcare system and how Americans pay for it. Romneycare would use the free market to rein in costs, which would amplify the role of the insurance companies.

"President Obama's trillion dollar federal takeover of the U.S. health care system is a disaster for the federal budget…and a disaster for the American people," Romney says on his website.

In his book, "No Apology: The Case for American Greatness," Romney argues that the way to fix health care is to fix the market incentives that drive up costs.

"America's health care is expensive because the incentives are all wrong – for the patient, the doctor, the hospital, and the insurer. Health care can't function like a market if it doesn't have incentives like a market," Romney wrote.

For example, under current co-pay and deductible policies, the patient doesn't care if he gets a $10,000 knee replacement or a $40,000 knee replacement.

The key is to open up the markets to competition to bring down costs, Matt Hoffmann, healthcare policy advisor for the Romney campaign, told MarketWatch.

One key piece of Romneycare that would benefit insurance companies is that it would allow insurers to cross state lines to sell their policies — currently discouraged or illegal in most states.

States would also get block grants for Medicaid to spend as they see fit.

In addition, Romneycare would get rid of Obamacare's health exchanges and set up a new exchange for Medicare where private health insurers and traditional Medicare would compete for seniors' business.

In a politically astute move, Romney chose to keep two popular pieces of Obamacare — forcing insurers to accept patients even if they have pre-existing conditions and charging the same for seniors with serious health problems.

How to Profit from Romneycare… and Obamacare

Clearly, Romneycare will make insurers a key part of privatizing the healthcare system, perhaps even more than Obamacare.

But as noted earlier, giant insurance and managed care companies are going to be big winners regardless.

If President Obama wins, managed care companies are expected to add another 20 million customers who will be eligible for Medicaid, the state-federal program for low-income people.

If Romney prevails, he will grant states new freedom to contract with private insurers, and make changes to Medicare that rely heavily on the managed-care industry.

None of this is lost on the big players. They are preparing for the coming bonanza by swallowing small fry that already have established positions in government programs.

Here are two likely to thrive on healthcare reform under either administration:

WellPoint Inc. (NYSE: WLP) — one of the largest U.S. managed care firms, announced July 9 that it would buy Amerigroup Inc. (NYSE: AGP), the country's largest private Medicaid managed care company, for $4.9 billion in cash.

The company offers various network-based managed care plans to large and small employers, individual, and Medicaid markets.

WEP has a P/E of 8.11, and the stock has a three-year return of 14%. It pays a dividend of $1.15 for a yield of 1.90%.

Aetna Inc. (NYSE: AET) — the nation's third-largest managed-care organization with a market value of $16 billion, provides medical, pharmacy, dental, and vision plans. The insurance giant said on August 20 it will buy Coventry Health Care Inc. (NYSE: CVH), a company with a large footprint in Medicare and Medicaid services, for $5.7 billion.
AET has a P/E of 7.59 and its shares have a three-year return of 36%. It pays a dividend of 70 cents for a yield of 1.8%

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