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Managed care shares slide as new tie-up threatens to disrupt healthcare industry

Shares of managed care companies took a dive following an announcement that three industry behemoths planned to enter the healthcare sector through a venture, company or service that has yet to be defined.

The partnership between Amazon.com Inc., Berkshire Hathaway Inc. and JPMorgan Chase & Co. to offer their employees lower-cost healthcare initiated a sell-off of all managed care companies tracked by S&P Global Market Intelligence.

The SNL Insurance Index fell 1.72% to 1,086.98 during the past five trading days, while the S&P 500 dropped 0.61% to 2,821.98.

Shares of eHealth Inc. and Cigna Corp. fell more than 13% and 7%, respectively, during the period. Shares of UnitedHealth Group Inc., Centene Corp. and WellCare Health Plans Inc. fell more than 2.5% during that time.

Cantor Fitzgerald equity analyst Steven Halper tied the sell-off directly to the announcement, though details in the release were sparse.

"Investors are probably assuming that the new venture represents a competitive threat to the long-term growth rate" of the companies, Halper wrote in an emailed statement. "Our view is that it is entirely too early for investors to take this view."

The announcement indicated that the initial focus of the new entity could be on technology solutions that will "provide U.S. employees and their families with simplified, high quality and transparent healthcare at a reasonable cost." Beyond that, Halper wrote, no one has any idea what other things the venture will pursue.

Dan Mendelson, president of research firm Avalere Health, agreed that investors jumped to conclusions too early given the opaque nature of the announcement.

Mendelson said in an interview that investors are "confused" by the proposition because of the lack of details but also recognize that Amazon's history of disrupting industries, merged with the prowess of Berkshire Hathaway Chairman, President and CEO Warren Buffett and the financial strength of JPMorgan, suggests the potential to do something big.

"I think that investors don't know what to think at this point, and that uncertainty can sometimes create weakness," Mendelson said.

But, he added, whatever healthcare company emerges from the joint venture will have to clear the same regulatory hurdles that established companies have with state and federal authorities.

"Insurance products are regulated in all 50 states, and in order to really enter into this market you have to know what you're doing," he said.

Despite the drop in share prices during the week, Cigna executives said during the company's fourth-quarter earnings cal Feb. 1 that the partnership creates an opportunity for the company as it could encourage an industry-wide trend away from the traditional fee-for-service model of health insurance — a model Cigna is already leaving behind.

In the life insurance space, shares of MetLife Inc. plummeted 10.39% during the week the company disclosed it would increase reserves by up to $575 million pretax and that New York regulators and the Securities and Exchange Commission opened a probe into the matter.

MetLife executives suggested in the company's December 2017 outlook that its failure to find a small percentage of its group annuities population might have a material impact in its financial disclosures.

The company announced that it would delay its 2017 fourth-quarter earnings results in wake of the reserve charge, but it maintained that there was no intentional wrongdoing. The company said it is not aware of any material deficiencies in identifying unresponsive or missing annuitants, policyholders or beneficiaries.

MetLife also announced that it would review its policies and processes to identify unresponsive and missing international group annuity annuitants and pension beneficiaries. Additionally, the company launched a global review of those policies and processes for other insurance and annuity products it offers.

Shares of fellow life insurers Principal Financial Group Inc., CNO Financial Group Inc. and Unum Group also fell more than 3% from Jan. 25 to Feb. 1.