Health-Services Stocks on Injured List
MedPartners Inc. is only the latest reason health-care investors aren’t feeling well these days.
As state regulators took control of MedPartners’ struggling California doctor-management group, the action fueled the turmoil that’s engulfed the health-care provider industry and sent its stock prices into a steep decline.
“This market is undergoing great change, which causes a lot of uncertainty, and investors tend not to like uncertainty,” said analyst Brooks O’Neil of investment firm Piper Jaffray Inc. in Minneapolis.
During the last 12 months, for instance, a Morgan Stanley Dean Witter & Co. index of 14 health-care provider stocks has plunged 53%, as a long list of factors have combined to put the companies under severe financial stress.
The companies range from “physician-practice management” groups (PPMs) such as MedPartners and PhyCor Inc. to nursing home operators such as Beverly Enterprises Inc. to providers of home-care services such as Costa Mesa-based Apria Healthcare Group Inc.
MedPartners itself plummeted an additional 17% on Friday after the California Department of Corporations seized its California operation, MedPartners Provider Network, and placed it in Chapter 11 bankruptcy reorganization. MedPartners fell $1 a share, closing at $4.81, in New York Stock Exchange composite trading, and it has now lost 57% of its value in the last 12 months.
The health-care providers generally are struggling to prosper in the face of increasing efforts to limit their reimbursement for their expenses. The stingier reimbursements are being dictated by both private insurers and managed-care organizations such as health-maintenance organizations, or HMOs, and government programs such as Medicare and Medicaid.
“That is putting pressure on the [health-care] services side to become more efficient, and of course it’s affecting their profits and their stocks in the meantime,” said Eugene Melnitchenko, an analyst with securities firm Sutro & Co. in Los Angeles.
Much of the pressure is coming from the 1997 U.S. balanced-budget law that substantially cut the growth of Medicare payments for all types of health care.
Indeed, the Congressional Budget Office said Friday that Medicare payments to hospitals for overnight care are expected to drop 1.5% this year after falling 2.5% in 1998, and payments to skilled-nursing facilities are expected to fall 3.8% in 1999.
“That’s a good example of what’s happening in this environment,” O’Neil said.
The reimbursement problems also mean that the providers can’t raise their prices to boost their revenues.
“I can’t think of a health-care company that’s saying its pricing is [rising] better than the rate of inflation,” said analyst Robert Lunbeck Jr. of investment firm Hambrecht & Quist in San Francisco.
So if the providers hope to boost earnings and get their stock prices higher, “the mandate across the board is to take out costs,” he said.
But that’s not going as quickly as hoped at many companies, particularly those that have been aggressively buying other operators as a way to overcome the reimbursement caps and quickly gain market share, analysts said.
“The PPM area especially grew through consolidation, and unfortunately some of the consolidators . . . encountered problems with [meshing] their physicians and managing their diverse markets,” Melnitchenko said.
“Medicine is still a local, very regionalized business, yet some of the consolidators were trying to become national and enter marketing areas that were foreign to them,” he added. “In many cases it hasn’t worked, and that’s what you’re seeing in the stocks now.”
But O’Neil and other analysts believe these problems, and even the MedPartners mess, won’t mean the demise of the PPMs. Many doctors will continue to see the groups as the best way for them to negotiate with the increasingly powerful HMOs from a position of strength, they said. But the groups themselves must run efficiently.
“PPMs have a future,” O’Neil said, “if they’re managed correctly.”
Health-care provider stocks also have come under “tremendous pressure” from widening government investigations into alleged Medicare and Medicaid fraud, Lunbeck said.
Bloomberg News was used in compiling this report.
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Feeling Pain in the Health-Care Business
Reinbursement woes, fraud probes, mismanagement and ill-conceived mergers have combines to make for troubled times in many health-care stocks in recent years. Hospital stocks have crashed since early 1998, while health-maintenance organization shares have ridden a roller-coaster since 1995. Monthly closes and latest for a 14-stock hospital and nursing home share index, and for a 12-stock HMO index, both compiled by Morgan Stanley.
HOSPITAL STOCK INDEX
Friday: 197.67
*
HMO STOCK INDEX
Friday: 255.14
* Source: Bloomberg
