Shares of U.S. health insurers rose on Wednesday after efforts to overhaul the health system moved away from creating a government-run insurance plan long viewed as damaging to the industry.

However, gains may have been held back as analysts said new measures that would expand the Medicare government plan to younger adults and require insurers to spend a certain amount of premiums on medical costs presented new potential risks.

Senate Democratic healthcare negotiators agreed late on Tuesday to replace a government insurance option with a scaled-back non-profit plan.

The so-called public option has drawn sharp opposition from the insurers and worried investors over concerns it would have unfair competitive advantages and potentially be the first step in a government takeover of the health system.

The S&P Managed Healthcare index <.GSPHMO> of larger U.S. health insurers rose 1.3 percent, compared to a 0.6 percent drop for the broader S&P 500 index <.SPX>. UnitedHealth Group increased 1.7 percent, Aetna Inc rose 1.3 percent and Humana Inc climbed 1.1 percent.

A tentative Senate deal announced last night is an important step toward getting the benign resolution that we think investors need to come back to the underperforming space, Leerink Swann healthcare strategist John Sullivan said in a research note.

Sullivan said Tuesday's compromise plan resembled earlier proposals for creating non-profit healthcare cooperatives, which have been seen as having a negligible impact on the insurers.

Speaking on CNBC television, Aetna Chief Executive Officer Ron Williams said it was very positive that the Senate had moved away from a government-run health plan, and that he hoped reform efforts would build on the employer-based healthcare system.

However, in exchange for losing the government-run insurance option, Democrats sought to increase regulations on the industry.

One provision that would require the insurance companies to spend 90 percent of premium revenue on medical services and costs drew concerns from analysts. Such medical loss ratios, as they are known in the industry, are closely watched by Wall Street to gauge company profitability.

The deal also seeks an estimate of how much it would cost to expand the government's Medicare health program for the elderly to allow Americans as young as 55 to buy-in to the coverage, said a Democratic staffer who did not want to be identified because the estimates are not out. Medicare, which also covers the disabled, is now available at age 65.

We have no detail on how this would work, but it could shrink the market for private-sector insurance as some people shift coverage from insurance companies being covered by the federal government, Wells Fargo analyst Matt Perry said in a research note.

Another healthcare analyst, Les Funtleyder of Miller Tabak, said the Medicare expansion could be positive for the insurers should it allow for private plan options, as currently exist in Medicare.

(Additional reporting by Susan Heavey)

(Reporting by Lewis Krauskopf, editing by Dave Zimmerman)

Healthcare Medicine