* Health insurer index rises 0.7 percent
* Hospital companies, insurers focused on Medicaid gain
* Drugmaker, biotech company shares up (Adds analyst comment, credit default detail, updates shares)
By Lewis Krauskopf
NEW YORK, March 22 (Reuters) - Shares of Medicaid insurers, hospital companies and even drugmakers rose on Monday as many investors concluded that passage of landmark U.S. healthcare legislation will add millions of new paying patients.
The S&P Health Care Sector index .GSPA was up nearly 1 percent on Monday, outpacing the broader market, after the U.S. House of Representatives gave final approval to a sweeping overhaul late on Sunday night. [ID:nN22144256]
Shares of hospital companies such as Community Health Systems (CYH.N) and health insurers such as Amerigroup AGP.N that focus on Medicaid plans for the poor led the increases. Analysts expect those companies to benefit as the reform package extends coverage to 32 million Americans.
For related graphic, see link.reuters.com/xub74j
Robert Schaeffer, portfolio manager with Becker Capital Management, noted that health insurance companies had been on the rise prior to Sunday's reform bill vote, foreshadowing a positive take by investors.
"It's obviously been perceived by the market, which is more often right than economists and politicians, but I think the changes have basically been perceived as generally positive," Schaeffer said.
"The last few weeks we've noted for example that the HMOs -- the Wellpoints and Aetnas of the world -- have been doing quite well," Schaeffer said. "I think that's probably an anticipation that, while there are some negatives, there's still a universe of 33 or 34 million people that at some point of time are going to go under some form of insurance platform."
The overhaul will expand the Medicaid government health plan for the poor and bar insurance practices such as refusing to cover people with pre-existing medical conditions.
Shares of health insurers -- the prime political target of reformers during the lengthy debate -- built on a rally from the end of last week. Investors were heartened that the uncertainty was cleared from the market and that sector companies avoided a worst-case scenario, such as the creation of a government-run competitor.
The Morgan Stanley Healthcare Payor index .HMO initially rose 1.9 percent but gave back some of those gains and was up 0.7 percent in late morning trading.
Large insurers WellPoint Inc WLP.N and UnitedHealth Group(UNH.N) shed early gains, with UnitedHealth down nearly 2 percent at midday. Medicaid-focused insurers such as Amerigroup and Molina Healthcare (MOH.N) climbed sharply, as the companies stand to benefit from an expansion of the program. Molina shares were up 5 percent.
The cost of protecting U.S. health insurers' debt with credit default swaps rose. [ID:n22194212]
Five-year credit default swaps on Aetna Inc (AET.N) rose to 110.5 basis points from 97.5 basis points at Friday's close, while Cigna Corp's (CI.N) credit default swaps rose to 120 basis points from 110 basis points on Friday, according to data from CMA DataVision.
Shares of hospital companies Community Health Systems and Tenet Healthcare (THC.N) rose 4 percent and 7.7 percent, respectively. The overhaul has been seen as helping hospital companies by adding more insured customers, thereby decreasing the numbers of patients who used services without being able to pay for them.
The NYSE Arca Pharmaceutical index .DRG was up nearly 1 percent, with Pfizer Inc (PFE.N) and Merck (MRK.N) each rising almost 2 percent each. Drug companies face new fees, but wider insurance coverage could help offset the costs by delivering new customers willing to fill costly prescriptions.
Similarly, the NYSE Arca Biotech Index .BTK was up 1 percent.
"We continue to believe money will rotate back into healthcare stocks now that the uncertainty of 'reform' is lifted," Citigroup analyst Charles Boorady said in a research note.
The S&P Health Care Equipment Sub-Industry index .GSPMED of medical device companies rose 1.6 percent. Such companies, including Medtronic (MDT.N) and Boston Scientific (BSX.N) face an industry tax, but it was cut in half to $20 billion and will not start until 2013. (Reporting by Lewis Krauskopf, Ransdell Pierson and Bill Berkrot; Editing by Michele Gershberg, Dave Zimmerman and Steve Orlofsky)