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The Winning Stocks in the Senate Health-Care Deal


Companies to consider after the latest round of politicking.


Reforming health care in the US has become a major pain for investors as many sit on the sidelines waiting to see how the system's overhaul will impact areas from insurers to managed-care companies to Big Pharma.

But recent developments on the Senate floor could mean promising returns for at least some of the sector stocks, while others get mixed reviews.

Tuesday night, the Senate reportedly reached a tentative agreement on what had been two major roadblocks for the passage of the health-care reform bill. Reports say that the public health option has been tweaked to include a nonprofit national health plan that would be orchestrated by the Office of Personnel Management, and that the Medicare program will be expanded to people who are between the ages of 55 to 64.

"It is a consensus that includes a public option and will help ensure the American people win in two ways: one, insurance companies will face more competition, and two, the American people will have more choices," said Senate Majority Leader Harry Reid in a statement to the press.

If these options make it through to the final bill, analysts say that managed-care companies and hospitals may be better off than was first imagined.

Miller Tabak analyst Les Funtleyder says it's time to buy the managed-care companies United Health Group (UNH) and Humana (HUM). "All of the managed-care companies will do well, specifically these two because they are the most exposed to government-run programs," says Funtleyder. Humana was trading near $40 per share on Wednesday, up 36% year-over-year, while United lingered near $29 per share, up 32% from the same time last year. "Reform doesn't seem like it is going to impede their operations, at least not as much as investors priced in," he adds.

Funtleyder says the expansion of Medicare will be better than treating uninsured patients. Lazard Capital Markets analyst Tom Gallucci agrees. During an interview with the Wall Street Transcript Report, he said, "Hospitals today are, in effect, a safety net for the system. People that don't have insurance ultimately are often getting care at the hospital, and the hospitals themselves are typically incurring the majority of the cost there. So to the extent a reform ultimately reduces the number of uninsured, it could be a major positive for that industry."

Leerink Swann analyst Jason Gurda says Tenet Healthcare (THC) is showing the most promise among the hospital stocks. "This group has had a terrific recovery this year after getting crushed during the credit crisis last year. If you look at all of their charts, they are U-shaped," he adds. "I've been favorably impressed with the progress Tenet has made this year. The risks are getting less and less each quarter -- they are near a breakeven on a cash flow basis and they have pushing out their debt structure, as well as being able to raise capital."

But the American Hospital Association doesn't seem to think the expansion of Medicare will play out well for hospitals. In an alert to members, the AHA said:

Remember that we worked hard to successfully and significantly change the House bill so its public option was not entirely based on Medicare rates, but largely negotiated rates, and in the Senate we worked to ensure that the Finance Committee bill has a nonprofit, nongovernmental public option based on negotiated rates and not tied to Medicare or Medicaid. Adding millions of people to these programs at a time when they already severely underfund hospitals is unwise and should be opposed.

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