Loooking at Orange County’s Past Year Sheds Light on ’86 : Health Care

Five years ago, turning a profit in the health-care business was all but assured. Insurance companies generally picked up the tab, and when they didn’t, the government did. But in 1985, with the government and private insurance companies imposing strict cost controls, breaking even was barely assured.

In Orange County, as throughout the nation, the most successful health-care companies were those that provided specialized and highly focused services.

Not only do these services tend to limit the companies’ exposure to competition, but many are viewed by insurance carriers as alternatives to more costly hospital care.

Cost-cutting pressures are expected to continue, if not increase, in 1986, according to analysts who are also predicting that the consolidation of health-care companies, which marked 1985, will persist in the new year.

Modern Society’s Ills

One company that enjoyed continued growth and success in 1985 was Comprehensive Care Corp., the Newport Beach firm that specializes in treating the ailments of modern society: drug and alcohol abuse, eating disorders and psychiatric problems.

Capitalizing on an increased willingness by Americans to talk about their problems and seek help, CompCare treats about 60,000 people a year, either at its free-standing hospitals or at institutions with which it contracts. Profits for its 1985 fiscal year hit a record $17.2 million.

CareMark Inc. of Newport Beach, which specializes in providing in-home medical and nursing services, is another example of a company that successfully found a service niche.

Taking advantage of the national trend toward shorter hospital stays, CareMark aims its services at post-hospitalization patients as well as the elderly and the handicapped who might otherwise be candidates for costly nursing-home care. For its efforts, the company’s earnings grew fivefold during fiscal 1985, to $7.4 million.

Hopes to Double Size

And likely to make money until the cows come home is Westworld Community HealthCare Inc., which faces little competition in its drive to milk the nearly untapped rural health-care market. The chain of 35 hospitals, nearly all formerly struggling government-owned operations, hopes to double in size by the end of the decade.

Although acquisition strategies often can be rewarding, it all depends on timing and selecting the right markets, according to industry analysts. “You have to know what your market is and you have to execute in a highly efficient manner,” said Randall Huyser of Montgomery Securities in San Francisco.

Although prepaid health maintenance organizations (HMOs) have been particularly attractive to hospital companies and insurance firms, merely operating such insurance plans offered no guarantee of success this year.

For example, HealthCare USA, which sold its hospitals to concentrate on running its own health maintainance organizations, continues to report losses despite tripling revenues since completing its acquisition of Independence Health Plan, a Michigan HMO with more than 100,000 members.

More Losses in ’86

Although the Orange-based company’s two major prepaid plans continue to post operating profits, start-up costs for other HMOs, along with stiff competition and a massive debt load, will keep HealthCare USA in the red into 1986.

“We were seduced by the idea that HMOs were magic and you would not make mistakes,” Harlan Loomis, HealthCare USA’s president, said in a recent interview. “And we were a little overaggressive in our expansion.”

But for the big and wealthy firms, the acquisition trail is likely to continue as a major expansion path in 1986, particularly among traditional insurance companies and large hospital chains seeking to broaden their services by adding prepaid health plans.

“I would think that we will see some more consolidation of HMOs,” said Montgomery Securities’ Huyser, who believes that Orange County-based companies, including HealthCare USA, may be likely acquisition targets.

“I don’t think you can rule any of them out,” Huyser said. “Potentially, they are all acquisition candidates (because) they are all small enough that a bigger company may be attracted to them.”