I’m calling it the Scott Brown call option. Or, should I say, the Massachusetts Senator-elect Scott Brown call option. Now, I’d venture to say that just a week ago, most people had never heard of Scott Brown. But today, he’s become the proverbial fly in the ointment for the passing of President Obama’s proposed health care reform—and he could be the virtual call option for many stocks in the health care space. 

The election of Republican Brown over Democrat rival Martha Coakley to fill the late Ted Kennedy’s vacant seat is nothing short of stunning—both from a political perspective and a legislative perspective. Politically, the election of a Republican in one of the bluest of blue states is a clear rejection of the Democrat Party’s dominance of the Bay State. Legislatively, it means the end of the Democrat Party’s filibuster-proof supermajority in the Senate, as Brown represents the 41st Republican vote—a vote that will most likely neuter any serious health care reform legislation.

Of course, Senate Democrats aren’t planning on taking the loss lying down, and party leaders still are committed to passing some version of health care legislation. But if the smart money on Wall Street is any measure of the likelihood that sweeping health care legislation is now doomed, then I think we can safely say that it is.

I say this because Tuesday’s market action in health care stocks was unambiguously higher. As it became clear that Brown had a significant lead over Coakley in the pre-election polls, investors poured money into health insurance stocks such as Aetna (AET), Cigna (CI), Humana (HUM), UnitedHealth (UNH) and WellPoint (WLP). Pharmaceutical stocks also performed well in anticipation of a Brown victory, with giants Eli Lilly (LLY), Merck (MRK) and Pfizer (PFE) enjoying substantial gains in Tuesday trade.

And stocks in the hospital sector, a sector largely thought to benefit from the passing of health care legislation, were substantially lower in an otherwise huge up day for equities.  Hospital operators such as Community Health Systems (CYH) and Tenet Healthcare (THC) all sold off big in anticipation of a Brown victory, and this just serves as confirmation that the Street thinks significant health care reform will likely be derailed.

Now, those same winning healthcare stocks experienced a bit of a sell-off in Wednesday’s trade, but this was more likely due to the overall market selling prompted by some disappointing high-profile earnings outside the health care space.

If we step away from the day-to-day machinations of the market, I think we can say that if the Brown victory manages to stop, or at the very least severely weaken health care reform, it’s going to be very good for health insurers and big pharma stocks going forward—and that is why I’m calling Tuesday’s election the Scott Brown call option.

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