Insurer’s results, analyst’s dim view hurt sector

LOS ANGELES (MarketWatch) � A drop in government business for Health Net Inc., coupled with a Goldman Sachs analyst�s dim view on health insurers in general drove down the sector�s shares Friday, even as the market enjoyed a broad rally.

Health Net HNT �fell 5.5% at $36.48 after reporting fourth-quarter net income of $60.2 million, or 71 cents a share, off 25% from the $80.4 million or 83 cents a share reported a year ago. Sales for the Los Angeles-based managed-care provider were $2.81 billion compared with last year�s $3.37 billion.

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Health Net is seeing a sharp drop in its government contracts due to a pact that was changed in April to a cost-reimbursement plus fixed-fee contract. That means Health Net can now only record revenue and expenses associated with administrative services and performance incentives.

The news sent an already jittery sector concerned over the fate of government health-care spending down on an otherwise positive day for the broader market. The Dow Jones Industrial Average DJIA �was up more than 150 points at the close.

But an industry outlook from Matthew Borsch, analyst for Goldman Sachs, may have cast another pall on the sector. Borsch held a conference call in which he contended that health insurers will see less upside going forward, and cut his overall rating on sector to neutral from attractive.

Insurers that provide managed care are hitting the bottom of an underwriting cycle, in which price increases for insurers are hitting lows not seen since the late 1990s.

Borsch said the cycle remains positive, but there is less upside potential for earnings. Complicating matters is the uncertainty over the industry as the nation awaits a Supreme Court decision on the Patient Protection and Affordable Care Act, and whether that affects the November national elections.

Longer-term growth for the industry could be in the cards, but it will have to wait until beyond 2012, according to Borsch. He reduced his ratings on Aetna Inc. AET � and Amerigroup Corp. AGP �but reinstated his rating on Cigna Corp. CI �and placed it on neutral status.

Aetna, which was cut to a buy from what Goldman calls a �conviction list buy,� fell 1.5% at $44.11. Amerigroup, which was cut to neutral from buy lost nearly 1% at $66.89. Cigna was off 1.3% at $43.55.

The general malaise hit other stocks, as UnitedHealth Group Inc. UNH �lost 2.3% at $51.31 and Humana Inc. HUM �and WellPoint Inc. WLP �were off marginally.

Elsewhere in health care, Edwards Lifesciences Corp. EW �tumbled by more than 11% to $71.54. That reversed strong gains from earlier in the week, as analysts raised concerns about the medical-device maker�s future in the wake of a disappointing earnings report late Thursday.

Goldman Sachs said Edwards�s recently approved catheter aortic valve may not see the sales the company is projecting, after a memo from the Centers for Medicare and Medicaid Services indicated there may be limited circumstances in which the device will be covered by Medicare.

Meanwhile, Wells Fargo cut its rating on the company�s shares to market perform from outperform.

Shares of Edwards shot up 6% on Tuesday after its Sapien trancatheter valve reported positive test results.

Although Edwards reported better-than-expected earnings late Thursday, its sales fell short of expectations for the fourth quarter. The company said net income was $63.1 million, or 53 cents a share, compared with $64.8 million or 54 cents a share for the same period a year ago. Sales were $430.2 million against last year�s $392.4 million.

Adjusted earnings were 62 cents a share. Analysts polled by FactSet Research had expected earnings of 59 cents a share on sales of $446.8 million.