I hope you are right. Did you see this artcle in the WSJ yesterday?
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Health-maintenance organizations, for years the health-care cost police for corporate America, are suddenly having trouble holding the line.
And that is spelling trouble for their stocks.
The problems in managed health care became glaringly obvious over the last week or so as first Aetna Inc. and then Cigna Corp. came out with the news that their third-quarter earnings would be hurt by spiraling health-care costs.
Shares of both companies have tumbled on the news. Aetna is off 12.6% since its announcement Sept. 29. Cigna is down 5.2% since its earnings warning Oct. 1.
Last week, the spotlight fell again on the red ink in the HMO business with the news that Prudential Insurance Co. of America was putting its health-care business up for sale. Two days ago, United Healthcare helped stem the tide of bad news when it told investors that third-quarter results should turn out all right.
But the pickup in medical costs has left Wall Street uneasy about the prospects for the HMO business, especially since the stocks recovered in recent months from a bloodletting last year when price competition was hurting profit margins.
"The question is: 'What is the sustainable margin in this business?' We've had a 10-year period when the HMOs have preyed on the doctors. Now the margin has got to go down," says Larry Feinberg, a partner at Oracle Partners in New York.
Some investors think the worst problems are confined to HMOs that target large corporate subscribers in the Northeast, such as Aetna and Cigna. Those companies "are going to have to reprice their product, and it's going to be a tough year for both," says Thomas Hodapp, an analyst with Robertson Stephens.
But some traders are also watching Oxford Health Plans, a longtime Wall Street darling which has, so far, been immune from the worries about rising medical costs and slowing enrollments. "You have to question how long Oxford can keep it up. If there is an accident brewing in the industry, it may be there," says Mr. Feinberg, whose hedge fund is betting on a downturn in Oxford's stock price. Wednesday, the stock closed at 77 7/8, up 1 3/16.
Oxford has been behind in paying physicians, and recently the New York state attorney general forced the company to pay interest on claims that had gone unpaid for 30 days. "The handwriting is on the wall," says Anne Anderson, an HMO analyst with Atlantis Research. "It's already pretty obvious this company has an issue with claims, but you can't see any of this in their results reported to date," she adds. "I can't believe they are immune."
Some Wall Streeters believe managed-care companies that concentrate on the California market are in the best shape now, even though they saw big price competition two years ago. Last year, rates for some subscribers in California actually declined; but this year, increases should come in at 2% to 3%, investors say. That's good for HMOs like United HealthCare and Pacificare Health.
The healthier price increases in California help explain why United HealthCare said this week that its overall price increases should come in around 5% this year, with some markets up 7% to 9%. That news sparked a two-day runup in its stock, which Wednesday closed at 53 3/8, up 3 3/16.
But others warn managed-care companies are swimming against the tide. After years of soaring enrollment and 20% annual subscriber growth, the HMO business is beginning to mature, making the huge revenue increases of the past harder to come by.
When revenues were ballooning, managed-care companies also exacted steep discounts and other cost-savings from doctors and hospitals. US Healthcare, which Aetna acquired last year, often managed to spend just 70 cents of every premium dollar each quarter on medical costs.
Lately, rising medical costs are overtaking rate increases. A recent study in the journal Health Affairs by analysts at the Center for Studying Health System Change in Washington found private health insurance premiums rose just 0.5% in 1996, while medical costs increased 2%. Initial estimates indicate the difference has widened this year.
Reasons include soaring drug costs, and doctors and hospitals regaining more bargaining power in negotiations with health plans as they have consolidated. Others point to a less healthy population being signed up by the HMOs these days. "Academic studies have shown that early HMO enrollees had fewer chronic health needs," says Fix Pitt Kelton analyst Greg Crawford.
With costs rising and price increases harder to come by, "the health plans are getting squeezed from both sides," says Paul B. Ginsburg, president of the Center for Studying Health System Change.
Last year, HMO shares took a dive because of worries about pricing, not costs. In California last year, some subscribers actually won rate decreases). This year, however, the picture looks brighter for investors, with rate increases of 2% to 3% forecast by many analysts. And so the stocks had recovered in the first half, with Aetna climbing to a high of 118 before losing one-third of its value recently. And Cigna hit 200 before dropping back to Wednesday's close of 176 5/8, down 2 9/16.
But the latest news has raised doubts again. Some investors are deciding that the California markets are recovering but the competition in the Northeast will still be strong enough to cause trouble, especially in light of the cost issues raised by Aetna and Cigna.
Some analysts believe that the HMOs will be okay, and that expected price increases of 5% will be enough to stave off trouble. Sanford Bernstein analyst Kenneth Abramowitz suggests United Healthcare, Pacificare and Oxford should have no trouble getting a 5% increase, if not more. But he warns that Aetna may just barely eke out increases of 4% to 5%.
For all of those stocks, except Oxford, increases of that size represent a significant jump over premium rate changes as recently as 1996, when prices actually fell for Pacificare and rose just 1% for Aetna and United, according to Mr. Abramowitz.
Some industry executives vow to hold the line. "One of the major challenges for the industry is to make sure that it maintains its discipline around pricing that is appropriate," says Edward Hanway, president of Cigna's Cigna Healthcare unit. "There is a level of pricing that is required for the benefits that we are giving. The days of buying business should be over."
So have shares of Aetna and Cigna been punished enough? At the moment, the two companies trade at a discount to the group's average multiple of 19 times the coming-year earnings. Aetna trades at 15 times the consensus estimate for 1998 earnings of $5.30 a share, while Cigna trades at 11 times 1998 consensus estimates of $15.35. Oxford Health, by comparison, trades at 30 times the 1998 consensus estimate.
No way, says Robertson Stephens's Mr. Hodapp. There's no reason to rush out now, because the outlook will continue to be difficult, he says.
Need a more down-to-earth reason to avoid the stocks? Look at what the smart money is doing, says Christopher Davis of Shelby Cullom Davis. Both Travelers Group Chairman Sanford Weill and US Healthcare founder Len Abramson have sold or exited the business. "Which side of the transaction do you want to be on?" he asks.
Copyright (c) 1997 Dow Jones & Company, Inc.
All Rights Reserved.
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