- Commentary -

October 27, 2009 (FinancialWire) (By Philip Holmes) – Stocks ended lower on Monday, led down by financials and healthcare stocks. Investors heard, before the bell, that the U.S. Senate is sending a filibuster-proof public health insurance option to the floor. Are players like Aetna (NYSE: AET) and Wellpoint (NYSE: WLP) in deep doo-doo? Maybe, maybe not.

The Dow Jones industrial average closed at 9,873.63, down by 98.55 points, while the Standard & Poor’s 500-stock index lost 11.41 points on the day, to close at 1,068.19. The Nasdaq composite index slumped 12.84 points, to finish at 2,141.63.

Well, we’ve heard for months about Triggers, Blue Dogs, Maine Snowe-storms and Democratic perfidy, but an important milestone in the health insurance reform saga has been crossed: the Senate version of the legislation will contain a public option.

Perhaps investors will move to dump health insurance stocks as a result. They shouldn’t be too hasty.

While Senate Majority Leader Harry Reid sounded forceful and definitive in his afternoon press conference, the matter is anything but settled. Even if it is, there are issues to be ironed out that could still make healthcare reform a bonanza for the likes of Aetna and Wellpoint.

For starters, Reid and Co. are pushing the weaker version of the public option — you know, the one that has to negotiate rates with providers like any other insurer. This plan will surely not threaten the profits of insurers like the “robust” public option, which pegs rates to Medicare +5%.

Also, remember all the talk about 3% overhead for Medicare versus 30% for private insurers? Good luck keeping overhead low on a public insurance scheme that has to a: negotiate rates, b: maintain individual relationships with monthly-paying policy holders, and c: has to be set up from scratch in all 50 states despite there being huge regulatory differences state to state.

But by far the biggest boon to private insurers is the extra leverage they now have to push for a stronger individual mandate. Now that the public option is in, it will be easier to get those 20-somethings to pay up, or else. And will they choose the public plan? Not if the private companies are clever and offer cool things that the government plan-which will likely attract lots of already-sick, already old individual uninsured-does not.

The weak sister public option could be the best thing that ever happened to private insurer’s balance sheets-at least until healthcare costs truly bankrupt the country. Stay tuned.

[Go to http://www.financialwire.net/?s=philip+holmes to see more commentaries by Philip Holmes.]

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