A Look at 1986, and the Climate for ’87 : Health Care

As the nation’s three-year-old drive to contain health care costs continued to gain momentum, some Orange County health care companies that once seemed almost invincible began to falter during 1986.

“Each year we are getting (more) companies which stumble,” said Jim McCamant, editor of the Medical Technology Stock Letter. “The ones that got clobbered in 1986 are the ones that at the end of 1985 looked great and didn’t have problems.”

As has been the case since 1983, when the federal government began limiting what it will pay for the care of Medicare patients, hospital management companies were among those which fared worst during 1986.

For example, Westworld Community Healthcare Inc. appeared to be in a secure niche, because the Lake Forest-based operator of rural hospitals and clinics virtually dominates its markets. Nevertheless, Westworld got caught in the Medicare squeeze.

The problems of Westworld, which was already laden with debt and hurting from the depressed conditions of many rural areas, were worsened this year by federal reimbursements that didn’t always cover the company’s costs. Westworld executives say the company will have a net loss for 1986. Last year, Westworld had $3.5 million in net earnings.

Because there may be new federal spending cuts in 1987, the uncertainty surrounding the Medicare program will worsen, predicts Randall Huyser, a health care analyst with Montgomery Securities Inc. “As long as the budget deficit is an issue,” he said, “the pressure will be on.”

Moreover, cost-cutting pressure by private insurers, health maintainence organizations and large employers who self-insure will continue to result in shorter hospital stays and smaller numbers of patient admissions during 1987, analysts say.

That was what made 1986 such a painful year for Comprehensive Care Corp.

One of the nation’s largest operators of treatment programs for drug and alcohol abusers, Irvine-based CompCare expanded to meet what looked like a growing demand for its services. But because of cost-containment pressures, CompCare wound up with too many beds and not enough patients.

For its fiscal 1986, which ended last May, CompCare’s net earnings fell 24%--the first annual decline in the company’s 13-year history.

CompCare now is developing new programs and attempting to enter new markets to recover its lost revenues and earnings.

Although cost-containment has hurt some companies, it has resulted in an increased demand for home health care, which often is far cheaper and just as effective as hospitalization.

Consequently, Caremark Inc. was one of the few major local health care companies that continued to do well in 1986. Analysts said the Newport Beach-based firm, which specializes in home-based infusion therapy, should be a winner next year, too.

But having a specialty “is not going to be as foolproof” as it used to be, said David Goldsmith, a securities analyst with the investment firm of Robertson, Colman & Stephens Inc. Companies that identify and service new markets, such as Caremark, will have to contend with competitors who try to get in on the new markets.

Among companies most likely to do well in 1987 are those that develop new technologies, particularly in cardiology, diagnostics and lasers.

One such company is Santa Ana-based Trimedyne, which hopes one day to market laser catheters as alternatives to bypass surgery in treatment of heart disease.

Although a laser catheter has yet to be approved for that application, Trimedyne currently is marketing such devices in several European countries for treating arteriosclerosis in leg arteries.