HMO shares up, hospitals fall ahead of Mass. vote

* Investors anticipate a close GOP win

* Health insurer index up 4.9 pct

* Tenet, Community Health shares fall

By Lewis Krauskopf

NEW YORK, Jan 19 (Reuters) - Health insurer shares rose on Tuesday, while hospital stocks fell as investors anticipated a Republican victory in the special Massachusetts election for a new U.S. senator that would throw healthcare reform into uncertainty.

The latest opinion polls in the neck-and-neck race suggested state Senator Scott Brown could defeat Democrat state Attorney General Martha Coakley, which would be a huge upset in the traditionally Democratic state. [ID:nN18159712]

The special election is to fill the seat of the late Edward Kennedy, a political giant and staunch proponent of health reform who died of brain cancer in August after holding office for 46 years.

The loss of one seat in the Senate could hurt the Democrats' ability to proceed to a vote on the planned healthcare overhaul that seemed to be in the final stages of the legislative process.

"The Street prefers a simple narrative," Miller Tabak healthcare analyst Les Funtleyder said. "The narrative is Coakley in Massachusetts is in trouble and therefore the healthcare reform bill is also in trouble."

The reform bills under debate in Congress would reshape the insurance market through new regulations, taxes and other changes. The health overhaul is President Barack Obama's top domestic priority.

"We would expect a broad healthcare rally upon a Brown victory, given that many generalists perceive Obamacare as unfavorable to the sector," Avik Roy, a healthcare analyst with Monness Crespi Hardt, said in a research note.

Shares of the S&P Managed Health Care index .GSPHMO of large health insurers rose 4.9 percent in morning trading. Shares of Humana Inc (HUM.N) jumped 7.3 percent, Coventry Health Care (CVH.N) rose 5.7 percent and Aetna (AET.N) gained5.1 percent.

The NYSE Arca Pharmaceutical index .DRG of large drugmakers also rose 1.6 percent, while the S&P Health Care Equipment index .GSPMED of medical device makers rose 1.1 percent, outpacing smaller increases for the broader market.

Hospital companies, which may gain more insured customers under health reform, saw their shares slump. Community Health Systems (CYH.N) fell 4.9 percent while Tenet Healthcare (THC.N) dropped 4.5 percent.

Wall Street was busily sorting through scenarios for health reform in the event of a Brown win, an outcome thought to be unfathomable only weeks ago.

Wells Fargo analyst Matt Perry said a Brown victory raises the chances that healthcare reform fails to 25-30 percent from 0-10 percent.

"We still think that the Congress will pass a health-care reform bill in the next several weeks, but a Brown victory would increase the chances that health-care reform fails," Perry said in a research note. (Reporting by Lewis Krauskopf, editing by Maureen Bavdek)