Wall Street Frets Over Price Cuts by State’s HMOs : Health care: Two O.C.-based providers take big hits on stock market as investors worry that reduced rates mean less profit.

California health care companies are pursuing reforms aggressively, but Wall Street isn’t so sure it likes what’s happening, industry analysts and executives at two giant Orange County HMOs said Wednesday.

Stock prices for health maintenance organizations, particularly in California, rebounded a bit Wednesday from the beating that Wall Street dished out Tuesday as traders worried that a price war might break out and earnings might suffer.

Investors became alarmed after news broke that a San Francisco Bay Area consortium of large employers won rate reductions of 5% to 10% from 17 HMOs, including FHP International Corp. in Fountain Valley and PacifiCare Health Systems Inc. in Cypress.

“HMOs are still a good investment in the long term,” said Kenneth S. Abramowitz, an analyst with Sanford C. Bernstein & Co. in New York. “But they are increasingly competing on price, and price competition increases the risk that earnings could drop. Wall Street is worried about price competition getting out of control.”

He said reduced rates could become the standard that all employers will seek. An overall 10% decrease in rates across the state, he said, would not only affect earnings but also would send hospitals toward bankruptcy as health care companies pull back even more on their use of hospitals.

But others see pressures throughout the health care industry to lower prices before Washington steps in with long-discussed reforms.

Doctors, drug companies and other providers and suppliers will have to lower fees and cut their own costs, said Mary O’Connell, an analyst in the San Francisco office of New York’s Louis Nicoud Associates. In addition, she said, HMOs and other providers and suppliers still have plenty of fat to cut from their overhead and other expenses.

HMOs, in fact, already are changing the economics of the health care industry, said executives at FHP and PacifiCare.

With HMOs covering 35% of the California market, physicians and other providers are coming to the managed-care companies to get business, FHP’s co-president Westcott W. Price III said. “But to do so,” he said, “they have to be in partnership with HMOs to hold down costs, and that has to benefit the residents of the state.”

For instance, doctors who have resisted changes in billing approaches are beginning to accept new methods devised by HMOs to save money and force physicians to look for ways to lower their own costs, said Richard Lipeles, a PacifiCare executive vice president.

“Being price competitive is nothing new to managed-care companies,” Lipeles said. That is the very attraction of HMOs and the reason the industry has grown, O’Connell pointed out.

O’Connell said Wall Street has long been particularly harsh to California HMOs, partly because the industry here has been so competitive. The stock prices of HMOs in the state had lagged behind others in the nation but have been catching up since December, she said.

Tuesday’s setback should be temporary, she said.

The selloff began after word spread about the deal won by the Bay Area Business Group on Health, which was formed by Bank of America, Pacific Telesis, Safeway Inc. and other large statewide employers. The group negotiated rate reductions for 300,000 employees, their families and retirees. Besides FHP and PacifiCare, other HMOs that approved reduced rates included Kaiser Permanente of Northern California and Health Net in Woodland Hills.

PacifiCare took the biggest stock hit as its price fell $5.625 a share. It gained back 87.5 cents Wednesday to close at $51.375 on the Nasdaq market. FHP’s stock fell 75 cents on Tuesday but rose 62.5 cents the next day to close at $24.625 a share on Nasdaq.

Health Net’s parent company, Health Systems International Inc., lost $3.50 Tuesday but picked up $2 on Wednesday to close at $30 a share on the New York Stock Exchange. Kaiser is a nonprofit company.

Ironically, neither FHP nor PacifiCare is a major player in the Bay Area Business group. PacifiCare members in the group account for less than 2% of the company’s total membership, and FHP has only 5,200 members in the group out of 1.7 million systemwide.