While the president didn’t include the public option in his proposal for a final health insurance reform bill, the campaign to add it on through reconciliation with an amendment requiring 50 votes is still alive. The real question is, how possible is it that the public option is added, and how the process, not the option itself will impact health insurance companies.

The first thing we must look into is whether or not the democrats actually have the political will to try to pass a public option with 50 votes. While Reid has signaled support for pushing the public option through, the letter to him has began losing steam and the rate at which it has been garnering signatures has slowed. Nevertheless, both Chuck Schumer and Bob Menendez, 2 of the other 3 people in the Senate Democratic leadership have signed the letter urging a renewed push for the public option. All the same, finding 50 democrats for the public option in a reconciliation process will be hard and there seem to be only about 52-53 “gettable” votes. Ultimately, what you believe will happen with the public option proposal will be what directly impacts your view on how health insurance companies will be impacted. I personally tend to be slightly pessimistic about the plan’s chances, and believe the buzz will die after the health care summit, in which Obama will not give the public option the wholehearted endorsement it needs. The interesting thing about this, is how it will impact health insurance stocks.

As you see below,

health insurers have not responded positively or negatively to the resurgence of the public option, since most see the plan as dead. Furthermore, investors have preferred longer term investment recently and therefore havin been buying on speculation that the public option could be revived. Thus the markets have not accounted for the possibility that the public option will come back.

However, when this revival is declared dead, as I believe it will be, the media attention will be more significant and more casual investors will be prone to jump on board and buy health insurance stocks. Naturally this will create a scenario where insurance stocks go up double what they should due to the death of the public option. Long term, this will cause stock inflation. But if you believe that it’s more likely than not that the public option doesn’t get through, then buy into health insurance and get a good short term gain from flawed responses to the ressurection and second death of the public option.