Jenks Healthcare Business Report Apr 2001

In the April 2001 issue:

Managed Care Industry: Is Aetna A Warning Signal
P. 1

***

Are Hospitals The Beneficiaries?
P. 2

***

More Bankruptcies
P.2

***

Financing Calendar
P.2

***

Selected Venture Capital Transactions
P.3

***

Jenks Stock List in Full
P.4

***

Analysts
P.6

***

Merger and Acquisition Market
P.8

***

Jenks Insider Trading Roundup
P.10

***

Notes and Briefs
P.12

Jenks Healthcare Business Report

Managed Care Industry: Is Aetna A Warning Signal

After closing the first quarter with solid price gains following a general drop during the first two months of 2001, managed care stocks may face a troubled market for the remainder of the year. Within the general market decline, managed care stocks appear to be attractive with good earnings visibility because of sharp premium increases. This compares to the rest of corporate America, which has been presenting investors with lowered earnings estimates for 2001 on a daily basis during the past several weeks. On March 28 alone, WellPoint Health Networks (NYSE: WLP) was up more than $4.50 per share, Humana (NYSE: HUM) $4.38 per share and Aetna (NYSE: AET) more than $4.00 per share. The question is, How long will it last?

With two years of double digit price increases, the managed "cost" industry has basically given the impression that it has wrung all of the inefficiencies out of the bloated health care market that it can and has resigned itself to medical cost increases that are themselves approaching double digits on an annual basis. Corporate America, amid the largest economic expansion in its history with the lowest unemployment rate in more than 20 years, has been a willing participant in this escalation of premiums. Concerned with attracting, and retaining, personnel, management has not fought the recent large premium increases with the same vigor of the late 1980s and early 1990s. This may change, however, if the current economic slowdown turns into a full-fledged recession. Evidence of pricing difficulties will not materialize until later this year.

On April 10, Aetna announced that first quarter 2001 earnings would be significantly lower than previous estimates because of approximately $90 million more of medical costs than had been expected related to services performed in prior quarters, primarily in the fourth quarter of last year. Almost one-half of this amount was caused by additional medical costs related to a Medicare market that the company exited effective the end of last year. Even using just 50% of the $90 million, this could push the company’s medical loss ratio from an estimated 87.5% to well over 88% for the first quarter of 2001. News of this unexpected rise in medical costs sent AET’s stock to a 52-week low of $26.75, down 24% from the March 28 jump in price, and caused a sell-off in other managed care stocks as well.

The other 50% came from a 100 basis point increase in a fourth quarter commercial HMO medical cost trend that was not expected. According to the company, this cost trend in the first quarter of 2001 is also running "considerably" higher than previously expected. When AET’s new CEO states that these "continued increases in medical costs are clearly unacceptable and do not reflect the positive potential of Aetna," consumers and physicians should expect an increase in denials and slower payment of claims in general. The positive potential, of course, is a reference to the company’s earnings capability and its stock price.

Prior to the higher medical costs announcement, AET had projected that the company would earn between $1.20 and $1.30 per share in 2001, which translates to $175 million to $190 million. Even with 50% of the $90 million mentioned above treated as a nonrecurring "other item" in the first quarter, earnings per share will drop significantly for the year, especially since medical costs still have not been controlled. The issue is whether Aetna can get these costs under control without damaging the company’s relationship with the medical community, or the consumer, more than it already has in the past year or two.

Aetna is one of eight health insurers that are defendants in a federal lawsuit filed by doctors in seven states, recently joined by the medical associations of California and Texas, that accuses the companies of a pattern of racketeering activity to deny medical care. In addition, Aetna is one of six HMOs in Connecticut that are being sued by two physician groups (that have been joined by the Connecticut Attorney General) for slow claims payments and arbitrary denial of medical care. Whether there is merit in either of these cases is unclear. What is clear, however, is that if Aetna, or any of the other managed care companies, tries to lower medical costs in an effort to protect earnings, it will be their legal costs that will have to be watched.

Read the past headlines.