Prognosis: Uncertain : Medicare Proposal Deals New Setback to Ailing HMO Stocks

Shares of many health maintenance organizations have been in critical condition for the last 12 months. Now President Clinton is threatening to inflict even more pain on the stocks, making them risky and volatile--although some individual issues might be worth a closer look, analysts say.

The president’s new plan to overhaul Medicare--and thus save the struggling program $138 billion over six years--includes provisions that would slash government payments to HMOs for treating Medicare patients.

The plan is yet another bitter pill for the HMOs, whose earnings prospects aren’t expected to improve anyway because the organizations are being squeezed between rising medical costs and their own inability, or unwillingness, to raise prices enough to offset those increases.

Last month was the most recent major period for HMOs to enroll new corporate clients, and “despite the determination of many publicly traded HMOs to raise prices, some HMOs continued to grant price reductions in an effort to capture market share,” analyst Christine Bennis of UBS Securities in New York notes in a new report.

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The Clinton Medicare plan mars what is otherwise seen as a growth opportunity for HMOs. With the support of federal lawmakers, the HMOs are aggressively recruiting Medicare recipients to join HMOs as a way of helping Uncle Sam control health-care costs.

But “Clinton’s proposals have clearly put HMOs more on the defensive,” Lehman Bros. analyst Tom Gallagher wrote shortly after the president’s plan was announced two weeks ago. The projected government savings on payments to HMOs are much bigger than the White House had indicated earlier that it would propose, amounting to $45 billion over the six years, he noted.

To be sure, Clinton’s proposal faces a political battle, and some in Congress were quick to criticize the plan. Some lawmakers blasted the HMO cuts in particular, saying they would drive HMOs away from recruiting Medicare patients.

That didn’t stop investors from dumping some HMO stocks, notably Cypress-based PacifiCare Health Systems Inc. (ticker symbol: PHSYA for its Class A shares), the nation’s biggest HMO for Medicare recipients.

PacifiCare, which is in the process of acquiring Santa Ana-based FHP International Corp. (FHPC), another HMO that caters to Medicare patients, has dropped from $85 a share in early December to $71.50 as of Monday.

Otherwise, HMO stocks held up relatively well in the face of the president’s plan. Many of the shares fell in mid-January as word leaked out about the proposed cuts, and again after the president’s formal announcement, but there was no panic sell-off. A few stocks even advanced after the initial turbulence, including Health Systems International Inc. (HQ) and Foundation Health Corp. (FH).

But investors should expect more volatility in the stocks as the president’s proposal is debated on Capitol Hill, said Robert Hoehn, an HMO analyst at Salomon Bros.

“That’s true of any companies in a regulated or quasi-regulated industry, which health care is,” he said.

That provides one more headache for HMO shareholders, who have had to watch their shares lag the performance of those in other health-care sectors over the last year, including the drug and medical-supplies groups.

“With few exceptions, 1996 was a bad year to be an HMO investor,” UBS’ Bennis said. While the Standard & Poor’s 500 index rose 20%, “stock prices in the [HMO] sector fell an average of 22%.”

Among those posting double-digit declines over the last 12 months were Healthsource Inc. (HS), Humana Inc. (HUM) and WellPoint Health Networks Inc. (WLP), a Woodland Hills-based operator that’s been among the few HMOs reporting earnings growth.

WellPoint also is among the few HMO stocks that analysts are recommending currently, despite the industry’s poor overall fundamentals and Clinton’s proposals.

Bennis likes WellPoint, now at $33.625 a share, because it “has maintained control over its health-care costs” and has achieved strong results from offering service to small employer groups, particularly in California.

She also recommends Oxford Health Plans (OXHP), which mainly serves the New York City region, on grounds that it’s poised to gain substantial enrollment from Medicare patients “while containing medical cost inflation in 1997.” The stock currently trades at $53.75.

Even United HealthCare (UNH) and PacifiCare, despite their heavy exposure to Medicare, are recommended by some analysts.

“Most members of Congress believe HMOs are the only vehicle we have to contain costs” for Medicare recipients, said analyst Lori Price of Oppenheimer & Co. And PacifiCare especially “understands how to handle the Medicare business better than anyone,” she said.

PacifiCare on Monday reported quarterly earnings of $1 a share, up 14% from 88 cents a year earlier and 1 cent ahead of analysts’ consensus estimate.

Salomon’s Hoehn said PacifiCare also is among the best at keeping costs down enough to turn a profit even if the federal government succeeds in lowering HMOs’ reimbursement for Medicare patients.

“With them, any premium reduction” under the White House plan “is more muted than it is for other players,” he said.

Times staff writer James F. Peltz can be reached at james.peltz@latimes.com

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Bitter Pill

Stocks of most health maintenance organizations struggled last year, and now they’re under more pressure from President Clinton’s plan to overhaul Medicare. A look at some major HMO stocks:

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Ticker Recent 12-month Stock symbol price % change Health Systems HQ $26.00 --20% Healthsource HS 13.00 --59 Humana HUM 18.50 --32 Oxford Health OXHP 54.00 +63 PacifiCare Class A PHSYA 74.50 --16 United HealthCare UNH 47.25 --26 WellPoint Health WLP 33.50 --14 Standard & Poor’s 500 +23

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Source: Bloomberg News