By Lewis Krauskopf
NEW YORK (Reuters) - Shares of U.S. health insurers lost initial gains on Wednesday as new proposed regulations that are part of efforts to overhaul the health system overshadowed momentum from the decline of a government-run insurance plan.
A provision that would require insurers to spend 90 percent of premium revenue on medical services costs drew concern on Wall Street that it would significantly crimp profits.
"By definition, you're going to crunch the margins," Pali Capital analyst Sheryl Skolnick said. "Once you start that kind of regulation, it's a short step to a regulated utility."
The Standard & Poor's Managed Healthcare index <.GSPHMO> of large U.S. health insurers was down 1.1 percent in afternoon trading, while the broader S&P 500 index <.SPX> slipped only 0.2 percent.
WellPoint Inc <WLP.N> fell 1.4 percent, Cigna Corp <CI.N> 1.5 percent and UnitedHealth Group Inc <UNH.N> 1.0 percent.
Uncertainty over a proposal to expand the Medicare government plan to younger adults also may have been pressuring the stocks.
And in the latest attack on the industry, Congressional Democrats released a report charging that private companies offering Medicare plans spent billions of dollars boosting profits, marketing and advertising rather than on patient care.
Earlier in the session, the managed care index had risen as much as 2.5 percent as Senate Democratic healthcare negotiators agreed late on Tuesday to replace a government insurance option with a scaled-back non-profit plan.
The so-called public option has drawn sharp opposition from the insurers and worried investors over concerns that it would have unfair competitive advantages, and potentially be the first step in a government takeover of the health system.
Speaking early Wednesday morning on CNBC television, Aetna Inc <AET.N> Chief Executive Officer Ron Williams said that it was "very positive" that the Senate had moved away from a government-run health plan, and that he hoped reform efforts would build on the employer-based healthcare system.
However, in exchange for losing the government-run insurance option, Democrats sought to increase regulations on the industry.
The amount companies spend on medical costs, known in the industry as a medical loss ratio, is closely watched by Wall Street to gauge company profitability.
"You can't expand membership and enrollment without a big price tag, and that big price tag for the health plans will be to give up autonomy on their (loss ratios)," Pali's Skolnick said.
Asked about a mandatory loss ratio on CNBC, Williams said: "It would absolutely stop the innovation in the system."
The Democrats' deal also seeks an estimate of how much it would cost to expand the government's Medicare health program for the elderly to allow Americans as young as 55 to "buy in" to the coverage, said a Democratic staffer who did not want to be identified because the estimates are not out. Medicare, which also covers the disabled, is now available at age 65.
"We have no detail on how this would work, but it could shrink the market for private-sector insurance as some people shift coverage from insurance companies to being covered by the federal government," Wells Fargo analyst Matt Perry said in a research note.
Another healthcare analyst, Les Funtleyder of Miller Tabak, said the Medicare expansion could be positive for the insurers should it allow for private plan options, as currently exist in Medicare.
(Additional reporting by Susan Heavey)
(Reporting by Lewis Krauskopf, editing by Dave Zimmerman and Gerald E. McCormick)