Path: bloom-picayune.mit.edu!snorkelwacker.mit.edu!americast.com!americast.com!americast-post Newsgroups: americast.ibd From: americast-post@AmeriCast.Com Organization: American Cybercasting Approved: americast-post@AmeriCast.com Subject: \TITLE Date: Wed, 28 Oct 92 13:12:52 EST Message-ID: <6.1992Oct28.131253@AmeriCast.com> 10/28/92 TITLE #m#gm#m#Election Puts Spotlight On Managed Care Christine Shenot In the fog that enveloped health-care stocks this year, health maintenance organizations and related "managed- care" companies seemed to be the only beacon. For months, investors flocked to the group as the one health- related industry that appears certain to prosper at a time when medical cost control has become the battle cry#m#cq#m# of liberal and conservative politicians alike. "I feel strongly that managed-care companies are very well- positioned under any of the (health reform) proposals that we think are likely," said Eleanor Kerns, an analyst with Alex. Brown & Sons Inc. That widely held view, coupled with a string of healthy profit gains, helped push HMO stocks to dizzying heights this year. For the past two weeks, the HMO stock group ranked No. 1 among the 197 industry groups tracked by Investor's Business Daily according to six-month price performance. This week, however, HMO stocks have begun to fall in a profit- taking binge spurred by U.S. Healthcare Inc.'s third-quarter earnings report Monday. The company's earnings rose 22% to 44 cents a share, in line with Wall Street estimates. But investors focused on an increase in U.S. Healthcare's medical loss ratio - expenditures as a percentage of premium revenue - and a resulting decline in operating margins. The stock plunged 63/8 Monday, and eased another 21/4 yesterday to 411/8. "The fact that U.S. Healthcare's margins appeared to come under pressure really spooked people," observed Salomon Brothers Inc. analyst Margo Election Puts Spotlight On Managed Care Vignola. While at least one brokerage downgraded its rating on the stock, she reiterated her buy recommendation, saying she remains bullish on the company's growth prospects. The HMO group's performance this year stands in stark contrast to the track record of many other companies on the service side of health care. With a few exceptions, many provider- based businesses are suffering the same crisis of confidence that per- vades the drug industry. Companies that provide treatments to pa- tients at home, for example, have been abandoned by investors who expect recent pricing pressures cited by some industry players to worsen if Arkansas Gov. Bill Clinton is elected president. And those concerns may persist in the coming year regardless of who wins the election. Services account for up to 85% of the nation's total health-care tab. Most observers say that reform of the U.S. health-care sys- tem will focus initially on lowering the cost of providing care inside and outside the hospital. Increasingly, health policy ex- perts point to the likelihood of a "managed competition" approach that would create incentives to get more patients to join HMOs and similar systems. With more people covered by HMOs, reimburse- ment to providers would continue to decline. "Clinton is enemy No. 2" for providers, said Putnam Health Sci- ences Trust manager Cheryl Alexander. "Enemy No. 1 is managed care." While managed competition reforms would appear to spell unlimited opportunity for HMOs, some analysts caution that even these companies would face new challenges. John Runningen, an analyst with Robinson-Humphrey Co., says HMO operators will need substantial infrastructures and capital in order to profit from huge numbers of new patients. He says that a massive shift of previously uninsured patients into HMOs could create financial stresses, since those patients likely would have worse than aver- age health problems. The main issue, he added, is "can they price (the new business) profitably so that you don't lose on the claims side." Kerns, of Alex Brown, cites several leading HMOs that are "cash rich" and poised for continued strong growth. They include U.S. Healthcare, United HealthCare Corp., PacifiCare Health Systems Inc. and Foundation Health Corp. She wasn't available for comment on activity among the stocks this week. Kerns also sees growing markets for Value Health Inc., which markets specialty services to HMOs and traditional insurers. The services monitor costs and quality in prescription drug, mental health and foot care bene- fits. High Prices Cited Despite the industry's strong fundamental outlook, some money managers say they are holding off on further purchases of HMO stocks, citing their high prices. "As far as committing new money, we'd rather buy the sectors that are down," said John Kaweske, manager of the Financial Strategic Health Sciences Portfolio. In the services arena, he favors cer- tain stocks in the home infusion industry, which provides in- travenous drugs and nutrients to patients at home. The group took a nose dive late last month when Medical Care America Inc. announced that a revenue shortfall in its home infusion business would keep third-quarter earnings flat. The company, whose newly acquired home infusion unit is known for high-priced, high- qual- ity care, cited competition from low-cost providers. Medical Care's stock was decimated, losing 57% in one day, and others swooned in sympathy. The stocks have edged still lower in recent weeks. Most recently Tokos Medical Corp., a provider of home care for pregnant women at risk of premature delivery, plunged 41/8 to 185/8 Monday after reporting disappointing third-quarter earnings. The company posted a modest 8% gain to 14 cents a share, far below anlaysts' estimates. Despite the bad news from some companies, Kaweske says the home health-care sell-off that began early this year, was "completely overdone." "Select com- panies have seen price discounting," he acknowledged. "But just as many are in different niches" that are less vulnerable to pricing pressures. Kaweske likes Quantum Health Resources Inc., which specializes in treating hemophilia and respiratory problems, and T2 Medical Inc., whose services include chemotherapy for cancer patients. Neither firm, he contends, is suffering from pricing difficul- ties. Randall Huyser, an analyst with Furman Selz Inc., agrees that the wholesale abandonment of home health-care stocks is mis- guided. "I do think the pricing pressures are here to stay," he acknowledged. But, he added, "the more cost-effective providers will be winners under any scenario." If the outlook for outpa- tient service companies appears mixed, the same can be said for institutional providers of care such as hospitals, rehabilitation facilities and nursing homes. Nursing home stocks for the most part have regained the ground they lost in the first half of the year. Analysts believe the major problems that hurt the industry in recent years -low rates of reimbursement by state Medicaid programs for the poor and a labor shortage that increased person- nel costs - have disappeared for now. Eugene Melnitchenko, an analyst with Legg Mason Wood Walker Inc., cites Beverly Entreprises Inc. as a turnaround that is benefiting from a restructuring and better management. The stock is favored by other analysts and money managers as well. Hospital Stocks By contrast, hospitals stocks are viewed as a group to avoid be- cause of ongoing pressures on reimbursement. The exception, ac- cording to Salomon's Vignola, is Humana Inc. She and others note the company plans to spin off its strong HMO business, an event they say is not reflected in the stock price. Finally, analysts see some prospects for improvement in rehabilitation hospital stocks. Alexander, manager of the Putnam fund, says these com- panies are better able to demonstrate the outcomes of their treatment, a factor that may make reimbursement pressures less of an issue for them. This article is copyright 1992 Investors Business Daily. Redis- tribution to other sites is not permitted except by arrangement with American Cybercasting Corporation. For more information, send-email to usa@AmeriCast.COM