Health Care Gets a Shock Treatment

By JOHN JANNARONE Fear of nationalization is a fair rationale for abandoning stocks. But investors appear to have overreacted in dumping health-insurance shares. The likes of Aetna and UnitedHealth Group have fallen over 20% in the past week, with the bulk of that coming Thursday after President Barack Obama's budget was disclosed. The obvious culprit for the wreckage was a move to cut prices for lucrative Medicare Advantage plans administered by health insurers. Those services are easy targets, with fees set by the government. The plan aims to save $177 billion by switching to a competitive bidding process. The program accounts for 10% of Aetna's profit and 15% of UnitedHealth's, according to Citigroup. Even in the unlikely event that the plan destroys all their profits from the program, the share-price reaction is excessive. Most of their business relates to private-sector health plans. Those could even benefit from broad moves to expand coverage. The real fear is creeping nationalization, or at least uncertainty over how rules for private plans will shake out. But while details of Mr. Obama's plan remain a mystery, talk of a free-market bidding process hardly smacks of full government control. Aetna is trading at 6.3 times this year's expected earnings, and UnitedHealth is trading at a multiple of 6.2. Shares of insurers with heavy dependence on Medicare Advantage have suffered the most. HealthSpring's shares are down almost 50% this week, leaving it with a price-to-earnings ratio of 3.6. But while HealthSpring's business might become truly sick, Aetna and UnitedHealth still offer investors some room for recovery. Write to John Jannarone at john.jannarone@wsj.com