Price-War Fears Pressure HMO Stocks to Decline : Market: The slide is sparked by U.S. Healthcare officials who told an industry conference first-quarter earnings would be much less that expected.
Shares of managed-health-care companies, including two large Orange County HMO concerns, tumbled 10% or more on worries about price wars and pressure on profit margins.
The slide was sparked by comments from U.S. Healthcare Inc. officials at an industry conference and a warning by United Wisconsin Services Inc. that first-quarter earnings will be much lower than expected, analysts said.
The news rekindled fears that control of medical costs in managed-care plans, such as health maintenance organizations, won’t keep pace with a drop in premium rates. The concern triggered a flurry of analyst downgrades and sent some investors in the high-flying stocks heading for the exit.
The Wisconsin earnings disappointment is “scaring the group,” said John McHugh, an analyst at Hambrecht & Quist. “There’s also general skittishness about price competition in 1995.”
U.S. Healthcare shares fell $6.50, or 16%, to $33.25, its lowest price since October, 1993. More than 24 million shares changed hands on the New York Stock Exchange, making it the most active issue in the United States.
The third-most active stock was a rival HMO, United Healthcare Corp. Its shares fell $4.25 to $39.375, a drop of 10%.
Among California HMO companies, PacifiCare A shares plunged $7.75 to $67, FHP International dropped $2.81 to $23.94 and Wellpoint Health lost $1.50 to $31.125.
The rout also hurt Oxford Health Plans Inc., down $7.625 to $46.625; Humana Inc., down $2.75 to $21.875, and Coventry Corp., down $3.125 to $24.75.
United Wisconsin shares weren’t traded because of an order imbalance. The shares were last indicated to open at between $21 and $23 on the New York Stock Exchange. On Tuesday, the stock closed at $35.625.
United Wisconsin isn’t the first company to face problems operating its managed-care plans. Last month, shares of Miami-based life and health insurer John Alden Financial Corp. sank 38% after the company said its would take a $9.7 million charge for higher-than-expected medical expenses.
Managed-care plans such as HMOs offer health insurance for a prepaid, fixed fee. They cut costs by monitoring medical needs, slashing hospitals stays and steering members toward a limited group of doctors and hospitals.
However, most of the members enrolled with United Wisconsin and John Alden get care through PPOs, a more flexible kind of plan that offers higher reimbursements to encourage the use of selected doctors. PPOs have been less successful at controlling costs because members visit a larger pool of doctors and hospitals.
United Wisconsin’s troubles prompted analysts at Salomon Brothers Inc. and Merrill Lynch to lower ratings and slash estimates. The Merrill analyst, Lucy Olwell, also downgraded the entire group on the expectation that higher costs will hurt other companies.
Smith Barney Inc. analyst Geoffrey Harris also trimmed ratings on Wellpoint, U.S. Healthcare and Health Systems International Inc. this morning because the plans could face higher prices for medical supplies, drugs and other medical needs. The analyst did not change earnings estimates.
U.S. Healthcare was removed from Goldman, Sachs & Co.’s recommended-for-purchase list by analyst Roberta Walter, a research official at the firm said.
The downgrades come as many investors fear that slower premium growth will crimp earnings. So far the large, publicly traded HMOs such as U.S. Healthcare and Humana have been able to lower doctor and hospital costs just as fast and maintain profit margins. The companies begin to report first-quarter earnings next week.
While premiums grew at double-digit rates from 1989 through 1992, they were just 5.6% higher in 1994 and are expected to fall about 1.5% this year as employers made the plans compete for their business and demanded lower rates.
“I think this is the beginning of the end,” said David Lothson a PaineWebber analyst and longtime industry bear. “The environment has gotten much more competitive.”
Lothson predicts that the group will undergo a downward earnings cycle much like the mid-1980s, when premium increases slowed and profits stalled.
But other analysts argue that tough price competition for one region, such as Milwaukee, doesn’t necessarily spill over to other areas because markets for medical services and the penetration of HMOs vary widely from state to state.
“That doesn’t mean it’s the same in Atlanta or Tampa,” said Hambrecht & Quist’s McHugh.
What’s more, HMOs with lots of Medicare business are protected from the pricing pressure on privately funded care. Geoffrey Harris, a Smith Barney analyst, says he used to be one of the industry’s biggest boosters, with top “buy” recommendations on 16 HMO stocks last summer.
Now one of the bears, he still retains top ratings on Orange County’s FHP and PacifiCare because they do a lot of Medicare work. He says that Medicare rates, which are set legislatively by the federal government, haven’t faced the same pressure as prices for private care. At least this year, he says, Medicare reimbursement rates look favorable for PacifiCare and FHP.
