Sector Snap: Health insurers

NEW YORK - Shares of health insurers were battered throughout 2008, in part because of smaller profit margins bought on by years of price cuts. Analysts on Wednesday offered differing opinions on whether that will continue in 2009 and beyond.

Citi Investment Research analyst Charles Boorady said he thinks managed care providers will be able to post steadier margins in 2009 and 2010 because the recession is reducing their medical costs. However, an analyst from Goldman Sachs said profit margins will keep decreasing until 2011.

Based on data from the Centers for Medicare and Medicaid Services, Boorady said spending on prescription drugs is down, and Medicare is spending less on benefits. But those problems for health insurers are counteracted by steady prices and slower growth in medical costs such as testing and drugs, he wrote.

Boorady said health spending growth has decreased over the last three years, falling to 6.1 percent in 2007. That's the slowest pace since 1998, he said. But profit margins declined from 2006 to 2008, and he expects them to hold steady in 2009 and 2010.

Several health insurers have raised prices in recent months. But Matthew Borsch of Goldman Sachs said he doesn't think the companies will be able to maintain those prices. He said commercial coverage is decreasing because of job losses, and added that the high profit margins on commercial risk insurance could decrease.

Both analysts recommended shares of UnitedHealth Group Inc. as their top pick in the sector. Shares of the Minnetonka, Minn., company slipped 15 cents to $26.35 in afternoon trading.

Elsewhere, shares of Humana Inc. fell $1.12, or 3 percent, to $36.85, and Cigna Corp. lost $1.06, or 5.8 percent, to $17.11.

WellPoint Inc. stock slipped 4 cents to $43.95, and Aetna Inc. sank $1.36, or 4.5 percent, to $29.

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