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HMO profits to flatline
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January 17, 1997: 7:23 p.m. ET
Upcoming managed care earning reports look to be unhealthy
From Correspondent Irv Chapman
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WASHINGTON (CNNfn) - Remember Wall Street's love affair with health maintenance organizations?
Just a few years ago their stock prices were soaring. It seemed they had a bright future. So many people joined during the first half of the decade, in fact, that the majority of American workers are now in managed care.
But the investing climate has turned decidedly chilly for these companies since then.
HMO stock prices declined nearly 20 percent in 1996, and this year looks like it's starting out no better. When the largest HMOs report their 1996 earnings in a few weeks, the expectations are for weak, not strong, profits.
What's behind this turnaround?
The competitive landscape has shifted. There are a lot of HMOs competing for a finite amount of business. And, corporations have gotten savvy about shopping around for the best benefit package.
The upshot has been that HMOs have not been able to raise premiums like they used to. That's cut into revenue growth.
"We're now in a situation where a lot of the big corporate purchasing groups are playing one HMO off against another," explained health care analyst Gary Frazier of Bear Stearns. "As a result, the average price increase for the HMO industry was actually down slightly for 1996."
Also, the climate in Washington for HMOs has gotten chillier. The Clinton Administration's is proposing a cut in Medicare payments to HMOs.
The outlook for this year is premium hikes of two percent to three percent. That might finally stop the earnings downtrend.
But the longer term outlook is more uncertain. Some, like Value Health Inc., may choose to find merger partners. It accepted a buyout from Columbia/HCA Healthcare Corp. this week.
Indeed, health care analyst William McKeever of Schroder Wertheim said large HMOs will arise from this trend. (201K WAV) or (201K AIFF)
But others may decide that cost cutting is the best way to go - that the fat years left them with bloated sales and administration overhead.
Whatever happens, it probably won't happen quickly. That means shareholders may be taking a bath for a while. 
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