Goldman Sachs Report: Watered Down Senate Bill Would Lead To ‘Bull Case Scenario’ For Insurance Industry

The Huffington Post’s Sam Stein has obtained a Goldman Sachs report analyzing the impact of health reform on Cigna, Aetna, WellPoint, UnitedHealth and Humana. The report, conducted sometime in mid-October, concludes that a more moderate version of the Senate Finance Committee (SFC) legislation would lead to the highest “aggregate revenue growth” for the insurance industry, but that “no reform” would also result in substantial growth.

“At this point, we assign a 75% probability to health reform becoming law under the current effort,” the report notes and assumes that the current SFC proposal would likely become law. Under that plan, “we forecast sector earnings growth would be cut by 50% over the next decade as a result of health reform implementation”:

The reform measures that would most negatively impact earnings growth are funding cuts to Medicare Advantage and strict new regulations for the individual and small group business. These would be partly offset by the positive impact of expanded insurance coverage under reform….However, we believe final legislation is unlikely to get much worse for the industry than the current SFC reform plan and we do not believe a government-run public plan will be included in final legislation…To be clear, we expect the stocks would go down if the current SFC reform plan is made law, but we think that is mostly priced-in and the magnitude of further downside would be limited. By contrast, we see higher probability for scenarios that would lead to significant stock upside (i.e., no reform, or scaled-down reform under our “bull” case) than for the “bear” case scenario that would drive severe stock downside.

Should lawmakers further water-down the SFC bill, the industry will stand to profit, the report implies, suggesting that the “bull” case scenario is a reform package that brings in millions of new government-subsidized customers but does not require the industry to pay any new taxes.


“While more investors had already assume[d] the SFC plan would exclude a public option but include severe MA [Medicare Advantage] funding cuts, other aspects of the SFC plan have emerged more negatively than hoped,” the report says. “In particular, the provision to impose a $6.7 billion annual industry ‘fee’ starting as soon as next year, coupled with the weakening of mandates on individuals to maintain coverage.”

The worst case scenario — “where we introduce a government-run public plan that we assume would capture the majority of coverage expansion under reform as well as some of the industry’s current market-share in the [Middle market large employer] segment” — would produce revenue growth of just 2.4%, compared to 5.9% growth under the SFC and 6.2% growth without reform. Industry revenue would grow 6.9% from “more moderation of provisions in the current SFC plan or as a result of changes prior to the major implementation in 2013”:

The report estimates that there is a 25% chance that no reform will pass, 55% chance of the SFC-like legislation becoming law and just a 10% chance of a more moderate SFC alternative.

Meanwhile, UnitedHealth is urging its employees “to lobby the Senate against reform proposals that would hurt the firm’s bottom line.” The sample letters urge lawmakers to to “build upon what is currently working in the Medicare system and not limit the ability of seniors to access the [Medicare Advantage program]” and argue that “government-run health care will result in millions of Americans not being able to keep their current coverage and will lead to unintended consequences of higher premiums and less choice.” “In addition, I am disturbed by proposed legislation that will lead to increased taxes, less affordable coverage, and reduced benefits,” the sample letter says.