NEW YORK (MarketWatch) -- After much trepidation, investors on Monday embraced the health-care sector, with shares of insurance and related companies rallying as the Senate moved toward passage of a historic bill to overhaul the nation's health-care system.

The Senate early Monday approved a bill that does not include a provision for a government-run insurance plan, which managed care companies have strenuously objected to, arguing a public option would give private insurers government financing and the ability to set reimbursement levels artificially low.

"Health care investors find themselves having confronted their greatest fear, and, while there will be legislation, it will be significantly watered down from the version that the left had sought," said Mike O'Rourke, chief market strategist at BTIG LLC.

Shares of insurer Aetna Inc. AET gained 4.7%, while Cigna Corp. CI, +3.10% rose 3.9%, helping make health-care among the better-performing sectors of the S&P 500 Index's SPX, +0.82% 10 industry groups.

"The fear has subsided a bit. In general, the longer this takes, the less negative it seems to be for the vertical," said Art Hogan, chief market strategist at Jefferies & Co.

"We've had under-investment in the entire sector for 18 months waiting for clarification," he added.

The final Senate bill reduces cuts to home nursing to $39 billion over 10 years from the $42 billion previously slated, and delays rate rebasing from 2013 to 2014, which Jefferies & Co. analysts called good news for home nursing stocks, particularly Amedisys Inc. AMED, +1.89% .

In the Senate, all 58 Democrats and two independents in the early morning hours held against unanimous GOP opposition, garnering the 60 votes necessary to avoid a threatened Republican filibuster. Read about the razor-thin vote.

The Senate bill would mandate health insurance for almost all Americans, including 30 million now without coverage.

Health-care legislation passed the House in November, and that bill and the Senate version must now be reconciled before a measure goes to President Barack Obama's desk.

Health-care services, especially hospitals, are less likely to rally on anything less than greatly expanded coverage.

"If there is something less than universal health care, you're not going to have an uptick in hospital usage," Hogan said.

Heavy lifting ahead

The Senate's move prompted Gregory Nersessian of Credit Suisse to raise his price targets on seven insurers: Aetna, Cigna, Amerigroup Corp. AGP, +1.94% , Humana Inc. HUM, +3.08% , Molina Healthcare Inc. MOH, +6.54% , UnitedHealth Group Inc. UNH, +2.50% and Wellcare Health Plans Inc. WCG, +1.35%

"In our opinion, the [bill] is a positive first step toward improving some of the more dysfunctional elements of the health-care system," Nersessian said in a note to clients. "The heavy lifting will come when Congress is forced to slow the rate of medical cost growth through more aggressive payment restrictions and utilization controls down the road."

Some key provisions were added to the bill just before the vote, mostly relating to standards on how much the industry must spend on medical expenses. But it appears none of these will impose great hardship on any insurers.

The bill calls for large-group carriers to spend at least 85% of their revenue on medical costs, and small-group and individual insurers to spend at least 80%. Insurers would have to rebate any excess to policy holders under the bill. An earlier draft put the threshold, known as the medical cost ratio, at 75% for individual coverage providers.

"These [medical cost ratio] limits appear workable for group business but will likely require change in business practices for individual business," Goldman Sachs analyst Matthew Borsch said in a note to clients. He added that Wellpoint Inc. WLP faces the greatest exposure due to the new requirement on individual coverage.

But Wellpoint still took part in the insurers' party Monday, gaining 3% to $60.01.

Another concern for insurers was a proposed fee on carriers, that was expected to be $6.7 billion a year, Borsch said. But that will start at $2 billion and work its way up to $10 billion by 2017. Further, fewer not-for-profit carriers will be exempt from the fee, as their medical cost ratio must be at least 92%.

Borsch added this fee favors Cigna, hence the higher movement on its stock Monday, while Humana Inc. could be the most exposed. Humana shares were up 3.5% to $45.04.