What with the underwhelming market response to my previous article discussing the effect of the 2010 federal Patient Protection and Affordable Care Act (PPACA) on health insurers, I was pretty astonished (and relieved) to see Citigroup equity strategist Tobias Levkovich state many of the concerns which have occupied me.

The Independent Payment Advisory Board (IPAB, about which Avik Roy is travelling to Washington, DC to testify) will likely squeeze the prices of new drugs dramatically (while having little, if any, effect on Medicare spending). Under such conditions, does it really matter that there are signs of Big Pharma fixing the problems in its pipeline, as Levkovich questions?

Levkovich also expresses negative sentiment towards the payers. I’ve become even more stressed out about the (apparently) government induced rally in health insurers after examining the consequences of the 2006 Massachusetts health reform to carriers in the Bay State. Now labelled “Romneycare,” the 2006 law created an unprecedented level of government control over health insurers. In 2010, the state’s Insurance Commissioner mandated a rollback of health premiums. However, because the 2006 reform increased health costs, this resulted in increasing losses and looming insolvency. I estimate that Blue Cross Blue Shield of Massachusetts, the state’s largest health plan, is likely to be insolvent by 2015 or 2016, in the absence of reforming the reform. BCBS of MA is a non-profit, but the political dynamic facing the for-profit insurers is surely even more challenging.

Replicating this analysis for Colorado, where one large health plan has already announced plans to leave the state, my analysis demonstrates a “cascade” of insolvency, whereby only five of the ten largest plans in 2009 will be operating in 2017. Why would I lay the problems of Massachusetts at Colorado’s door? The current solvency of health insurers is well regulated and responsibly monitored, but PPACA (“Obamacare”) injects awkward incentives into the regulation of health plans.

Through the distribution of federal grants to states, PPACA encourages states to enact laws to increase their Insurance Departments’ power to dictate imprudent, artificially low premiums. There is no evidence that such power reduces the growth of premiums below those observed in states where Insurance Departments have no such power. But it does give perverse incentives to politicians to blame private health plans, rather than government interference, for increasing health costs. New Mexico, headed by a conservative Republican governor, passed such a law a few weeks ago, and California is likely too in the near future.

Most equity analysts, even bears like Mr. Levkovich, would probably accuse me of being overly dramatic. I hope that they are right. However, let’s also recall that President Obama, Secretary Sebelius, and many of their faction harbor a barely disguised goal of eliminating all health insurers in favor of a government-monopoly, so-called “single-payer” health system. Current stock prices of health insurers appear to ignore this risk entirely.