HMO FINANCIALS: Analysts Predict Moderate 3Q Gains
The Wall Street Journal reports that the majority of HMOs are expected to "post moderate third quarter earnings gains" despite rising medical costs. Analysts attribute the gains to premium hikes enacted earlier this year, which should cover the rising health costs in the private sector. But the news from the Medicare market is less rosy -- a government regulation limiting Medicare increases to 2% has prevented many HMOs from keeping pace with costs, up nearly 4% this year. Analyst Todd Richter of Morgan Stanley Dean Witter, said, "Medicare business went from being a growth hormone to a cancer." Despite an intense lobbying effort, HMOs failed to convince the Health Care Financing Administration to allow rate or benefit adjustments, prompting a spate of withdrawals from unprofitable Medicare markets.
Around the Industry
- United Healthcare Corp. announced that losses in its Medicare business forced the company to take a $900 million third quarter charge. Furthermore, United is exiting several Medicare markets and demanding an 8% premium increase for its commercial business for next year.
- Humana Inc. said it also plans to exit several Medicare markets and will take an $84 million charge after its merger with United Healthcare fell through. BT Alex. Brown Inc. analyst Gary Frazier expects "the costs of the scrapped merger could surpass the amount disclosed," but that Humana will nonetheless post a third quarter profit of 32 cents a share, up from 27 cents last year.
- Foundation Health Systems Inc. will likely post third quarter earnings of 35 cents a share, according to PaineWebber Inc. analyst Bill McKeever. Though down from earnings of 57 cents per share in the third quarter last year, it would mark a significant improvement over the negative cash flow of the second quarter, blamed largely on competitive pricing in California.
- Oxford Health Plans Inc.: Frazier predicts a loss of 77 cents per share on revenue of $1.2 billion, up from a loss of 99 cents per share last year on revenue of $1.06 billion. Oxford has worked to reduce administrative redundancies and should win a 9% rate increase for next year for both its government and commercial business, but other analysts remain concerned about Oxford's "cash position."
- Aetna Inc. underpriced a large portion of its business earlier this year, which analysts expect will "continue to weigh on the company." Richter "expects Aetna to report earnings of 90 cents a share on revenue of about $5.2 billion," down from last year's earnings of 98 cents per share, excluding items, on revenue of $4.63 billion.
- PacifiCare Health Systems Inc. is expected by analysts to earn $1.22 a share on revenue of $2.39 billion, up sharply from last year's 67 cents per share on $2.4 billion in revenue. But Frazier cautions that PacifiCare has been "tapping some reserves to prop up earnings," and observed that its earnings trends "don't seem to match revenue trends."
- WellPoint Health Networks Inc. may "outperform its peers because it doesn't have any Medicare business." McKeever anticipates that Wellpoint will earn 94 cents a share on revenue of $1.5 billion, up from 79 cents last year on revenue of $1.51 billion.
- Coventry Health Care Inc. has been rapidly developing its Medicare business, drawing close industry scrutiny. One analyst said the buildup, coupled with contracts with the ailing Allegheny Health, Education and Research Foundation, "could squeeze profit margins." Analysts expect third quarter earnings to remain stable with last year's at nine cents a share, on revenue that increased from $306 million last year to $588 million this year.
- Sierra Health Services Inc. "has developed a reputation for delivering consistently positive earnings" the Journal reports, and analysts expect earnings of 45 cents a share on revenue of $283 million, up from last year's 41 cents a share on revenue of $183.9 million