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As Healthcare Reform Speeds Ahead, Investors Get Nervous

A general air of uncertainty over what Washington has in store for health care reform is spreading to Wall Street, where investors are leery over what ramifications the undertaking will have on portfolios.

Mark Lennihan

Concerns range from the broad to the narrow. Some worry what the massive reform program, pegged in excess of $1 trillion, will do to the economy, while others see the full-bore entry of the government into health insurance as crowding out private insurers.

A quick survey of investment pros sees the primary winners being hospitals, drug companies and other service providers, while insurers and small businesses look likely to come out on the short end.

"If they pass everything that they're talking about, then I think there could be a huge impact on the investors just based on the impact that it would have on the economy and the deficit," said Matthew Tuttle, president of Tuttle Wealth Management in Stamford, Conn. "As far as health care companies, it'll certainly change that industry quite a bit."

Reflecting the fear over what could happen to private insurers that will have to compete with the government, Fitch's Rating Service on Friday lowered its rating on six insurers to "negative" from "stable." The revision now means that all 12 insurers that Fitch covers have a negative outlook.

The companies downgraded are Aetna , Blue Cross Blue Shield of Florida, Blue Cross Blue Shield of Idaho Health Service, Cigna , Coventry Health Care , and Health Care Service Corp.

While noting that the final package of government reform is not finalized and any changes could alter the assessment, Fitch said the prospects are not good for the industry.

"The Negative Outlook reflects the strong potential for national health care reform and its possible adverse implications on each company's financial strength and creditworthiness," Fitch said in a statement. "Though no bill has been finalized yet, and multiple policy schemes are possible, most of the alternatives being debated could weaken health insurers' financial profiles in Fitch's view."

The tone of uncertainty is being reflected on Wall Street, where investors are anxious to find out what the final details will be.

"When you try to rearrange one-sixth of the economy, that is huge," investor Warren Buffett said Friday morning on CNBC. "Something has to happen. What we get out of Congress won't be perfect—the question is, will it be an improvement? I don't have the answer to that."

Broadly speaking, the government plan would not only provide but also require health insurance for most Americans. Those with company-provided health care ostensibly would be allowed to stay in their current programs, but critics worry that some companies might withdraw their benefits and force employees into the government plan.

At the same time, those companies without plans would be forced to provide insurance or face penalties, a measure seen as particularly onerous for small business.

"The problem becomes when you force companies to do things that aren't profitable, to take on people with pre-existing conditions or take on people with bad risks, ultimately it makes the company less efficient," said Randy Carver, president of Carver Financial Services/Raymond James in Mentor, Ohio.

Carver, who once lived in Canada and says the nationalized health care system there is not equal to the current US system, compared the Obama administration proposal to the reforms mandated on the auto industry.

"If you force them to do things, they're inefficient," he said. "There's no upside to it."

To be sure, not everyone believes the reforms will be bad for investors.

Small businesses are likely to face increased costs, but even then their bottom lines may not be impacted severely, said Mickey Cargile, managing partner at WNB Private Client Services in Midland, Texas.

"The bottom line is it's going to make it easier for health care providers to get paid. It's going to reduce the indigent care costs across the system," Cargile said. "There will be some harm to the smaller businesses ... I don't think it's going to be great enough to affect them in terms of earnings and the value of their stocks."

Yet Cargile concedes that one of the costs of implementation could be more job cuts.

In an economy already heading toward double-digit unemployment rates, that could provide just another headwind toward recovery, and ultimately hurt investors.

"If it costs more than they say it's going to cost and they start doing the whole class-warfare thing ... then they wonder why the unemployment rate goes up to 15 percent," Tuttle said. "You can talk about a jobless recovery only so long. Once you start getting into high double-digits in unemployment, it's kind of hard to envision a recovery when just about everyone you know is out of a job."