HMO STOCKS: ‘Fall From Grace’ With No Turnaround In Sight
For at least the third straight year, managed care firms have been beset by "plunging stock prices," the Philadelphia Inquirer reports. Upon receiving the recent second-quarter reports from many health care companies, investors have had to face the reality: "Rate hikes didn't stick and costs remained high," which, coupled with significant Medicare HMO losses for most insurers, has led to losses or profits far lower than projected. Morgan Stanley Dean Witter has compiled an index of 12 managed care companies, called the Health Care Payors Index, "that has tracked what looks like seasonal swings in share prices." The result has been what analysts now consider a model of managed care stock behavior throughout each calendar year. According to Morgan Stanley Dean Witter, "the stocks of managed care companies have shown a tendency to rise in value on expectations of higher profits. In the spring or summer, as earnings fail to meet those expectations, share prices have fallen sharply." The index is actually below where it was in 1995, from 214.56 to 199.81, "showing that managed care companies have missed ... the bull market." Todd Richter, an analyst with the firm, said, "You hear about all these great rate increases. Then the group gets slammed. ... This industry has gone nowhere for three years. For three years, nobody is solving the problem."
Oxford Health has "effectively eras[ed] years of profits" recently, as its share price has fallen from $80 in July 1997 to $6.72 yesterday. This month, Prudential Securities analyst Charles Boorady recommended Aetna stock, which he said would reach $100. It closed yesterday at $67.69. Richter said he has no "strong buy" ratings on any HMO stock, and has an "outperform" rating on only two -- Cigna and Wellpoint.
Analyst Robert Hoehn of ING Barings Furman Selz blames the stocks' lackluster performances on exploding health care costs in the United States. The prime reason, he says, is an aging baby boomer population which requires more care and skyrocketing drug costs. HMOs' efforts to reign in costs are "still working their way through the health system." The single biggest squeeze on managed care's bottom line, however, is Medicare. As the government has slowed reimbursement increases to 2%, the market has demanded expenditure increases of 4%. And the worst may be yet to come. According to Hoehn, "You will not see an immediate turnaround in the next several weeks. I won't say (managed care stocks) have gone as low as they will go" (Fernandez, 8/19).
New York State No Exception
"With one exception, [HMOs] operating in the [New York] capital region continued to suffer loses in the second quarter," the Albany Times Union reports. MVP Health Plan of Schenectady was the only HMO in the black, recording $362,769 in profits on $97.8 million in revenue. On the other side of the ledger, Capital District Physicians' Health Plan Inc. lost $150,000 on $78.5 million in revenue, but did improve over last year, when it lost $660,065. Community Health Plan of Kaiser Permanente lost $1.1 million in New York State on $108.8 million, also improving on its $9.4 million loss last second quarter. Empire Blue Cross and Blue Shield "took the biggest hit" -- $30.2 million. Most officials blamed the "losses on the high costs of prescription benefits and so-called direct-pay plans -- state-mandated coverage for individuals not insured by their employers" (Hughes, 8/19).