A Free Fall of Profits?

With President Obama's health reform inching forward, some Wall Street folks are taking a harder look at the impact. A Goldman Sachs analysis of large insurers' earnings predicts health reform will cut managed care profit by half over the next decade.

The number is an aggregate—some insurers will fare better than others, according to the report published this week by Goldman analyst Matthew Borsch. But together Aetna Inc., Cigna Corp., Humana Inc., UnitedHealth Group Inc., and WellPoint Inc. will have 5 percent profit growth per year versus 10 percent if reform doesn't pass, the report concludes.

Borsch's analysis is based on the Senate Finance Committee bill that passed last week. Some of the provisions that would clip profit include proposed cuts to supplemental Medicare insurance offered through the insurers and a $6.7 billion a year tax on the industry to help pay for reform. Insurers say they'll pass the cost on to its customers, but Borsch predicts they'll absorb 20 percent of the tax.

The cuts to supplemental Medicare plans, known as Medicare Advantage, would hit Humana the hardest because it's the biggest player in that business. The report predicts Humana's earnings per share will drop 2 percent a year on average if the proposed cuts in the Senate Finance Committee bill stick.

No wonder the insurance lobby is hopping mad.

On the flip side, Cigna and Aetna will fare far better than their peers, with average EPS growth of 8 percent a year. That's because those companies are tied much closer to large employer plans that won't be affected as much by reform, Borsch says. Most of the proposed changes affect the individual market, which affects the other insurers.

Of course all of this is guesswork. No one knows for sure what the final bill will look like. And then there's the question of whether or not anything will actually get signed into law. Borsch puts the odds of reform passing at 75 percent.