Make Or Break Moment For Health Care Reform

Shares of Aetna, UnitedHealth and other HMO stocks fell on Tuesday as investors came to realize that healthcare reform is squarely back on the table.

And the make or break moment in health care reform could come as soon as Wednesday with President Obama addressing a joint session in Congress on this issue. The speech sets off a critical period for the administration as they power ahead with efforts to overhaul the nation's healthcare system before the year's end as the president has promised.

Make Or Break Moment

Most pundit agree that in order to be successful Obama must offer specifics about his plan, and squash confusion that opponents have used to exploit anti-reform sentiments -- such as beliefs the overhaul would lead to government-funded "death panels."

He must also spell out how he can pay for the nearly $1 trillion plan without boosting the huge U.S. budget deficit or cutting health insurance coverage for those who have it.

And he needs to rally and unite his fellow Democrats.

The Impact On Stocks

Fears that reform will dramatically cut into health insurer profits have pressured the industry's shares for most of the year.

Insurers took a fresh hit on Tuesday as details emerged on a health reform proposal from Senator Max Baucus, that included $6 billion in annual fees on insurers based on market share and a tax on so-called luxury health plans, according to documents obtained by Reuters.

Scott Fidel, an analyst with Deutsche Bank, said the components proposed by Baucus, who has not officially unveiled his plan, raised a "new element of concern."

But perhaps more important is what Obama says – or does not -- about the "public option," a government-run insurance plan proposed as an alternative to private insurance.

On Tuesday House Speaker Nancy Pelosi said a government-run insurance option is "essential" to passing the bill.

What’s the trade?

I’m a buyer of HMO stocks on dips like this, says Daniel Clifton of Strategas. Ultimately it doesn't seem like President Obama or Nancy Pelosi have the votes needed to get reform with a public option through Congress.

And on Friday's Fast Money analyst Charles Boorady was also bullish on the space. He said that although some companies will be hurt by health reform it seems investors are discounting something much worse than what's likely to happen to Aetna and UnitedHealth.

I’d recommend long positions in both names with Aetna my favorite, said Boorady. I think AET has as much as 25% upside after the uncertainty ends.

The whole space concerns me because of the uncertainty, countered Steve Grasso. If some kind of reform goes through I think HMO stocks could plunge -- and quickly.

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