HMO shares up, hospitals fall ahead of Mass. vote

NEW YORK (Reuters) - Health insurer shares rose on Tuesday, while hospital stocks fell as investors were anticipating 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.

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 even 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, and the White House said on Tuesday Obama does not believe heath reform is dead even should Coakley lose.

"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.

The Standard & Poor's Managed Health Care index .GSPHMO of large health insurers rose 2.6 percent in afternoon trading, after climbing even higher in earlier dealings. Shares of Humana Inc (HUM.N) jumped 5.0 percent, Coventry Health Care Inc (CVH.N) rose 5.0 percent and Aetna Inc (AET.N) gained 3.6 percent, all on the New York Stock Exchange.

The NYSE Arca Pharmaceutical index .DRG of large drugmakers also rose 1.8 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 Inc (CYH.N) fell 2.9 percent while Tenet Healthcare Corp (THC.N) dropped 2.8 percent.

"The way the stocks are today, they seem to be pricing in a Brown victory at this point," Leerink Swann analyst Jason Gurda said.

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 would raise the chances that healthcare reform fails to 25-30 percent from 0-10 percent.

"We still think that the Congress will pass a healthcare 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.

Gurda said he would recommend focusing on long-term corporate fundamentals and not on near-term trading on healthcare reform.

"At this point, it's very challenging to try to trade around what's going to happen with healthcare reform," Gurda said. "The timeframe is too quick and the volatility is quite heavy here. It's very difficult for someone to get an edge."

(Reporting by Lewis Krauskopf, editing by Maureen Bavdek and Gerald E. McCormick)