By MILT FREUDENHEIM
EVEN as the nation's health care costs keep climbing,
the insurance companies that try to manage those costs have been
prospering and increasing their profit. But some analysts see trouble
ahead.
The share prices of three of the largest insurers - WellPoint, UnitedHealth
Group and Cigna - reached 52-week highs early this month, at the peak
of a two-year surge in the stocks of managed care companies. But since
April 7, the big insurers have led the way down as a Standard & Poor's
index of managed care stocks fell 8.4 percent while the broader S.& P.
500-stock index slipped only 3.3 percent.
It did not help when UnitedHealth, the second-largest managed care
company, reported that it had added fewer members in the first quarter
than it forecast. Some investors paid more attention to that than
to the 41 percent profit increase UnitedHealth reported for the quarter.
UnitedHealth was showing the effects of a national trend. Although
175 million Americans are covered by employer-sponsored health insurance,
further declines in manufacturing jobs and a spotty economic recovery
have braked increases in enrollment. And by the latest count, the number
of people without health insurance has risen to 45 million.
"Enrollment growth in the industry has slowed to a crawl," said
Joseph D. France, an analyst at Banc of America Securities.
So investors will be paying close attention today and tomorrow to
the enrollment data for the first quarter to be reported by WellPoint
and Aetna as part of their financial results.
WellPoint, the largest managed care company, with 28 million people
enrolled, is expected today to report a 14 percent increase in profit,
to $1.83 a share, from the first quarter a year earlier, according
to analysts polled by Thomson Financial.
Aetna, the third largest, with 13.7 million enrollees, plans to report
its results tomorrow. The analysts' consensus is $1.07 a share, up
22 percent from last year.
UnitedHealth, with 22.4 million members in its medical care programs,
is widely admired for its strong management and its strategic moves
into new product lines. One expanding business is sales to large employers
offering their workers high-deductible policies combined with health
savings accounts, although the 135,000 new members in the first quarter
were a relatively modest addition by UnitedHealth standards.
United's sharply higher profit was helped by lower-than-expected medical
costs for hospitals and drugs. Patients spent less time in hospitals,
possibly reflecting a push by insurers for prompt discharges, as well
as higher co-payments required of patients. Drug outlays dropped as
some doctors stopped prescribing Vioxx, Celebrex and similar expensive
painkillers amid concern about their cardiovascular risks. And analysts
say managed care stocks also benefited when many investors responded
by bailing out of drug stocks and putting their money into organizations
like WellPoint and UnitedHealth.
Whether this tide will soon turn is hard to predict. But movements
in and out of drug stocks can make very big waves, said Jason Nogueira,
a managed care analyst at T. Rowe Price. He said that the market capitalization
of Pfizer, the biggest drug company, was greater than the combined
market value of all the managed care companies.
Charles A. Boorady, an analyst at Smith Barney who is bullish on managed
care, said some investors returning to pharmaceutical stocks might
have contributed to the recent decline in HMO share prices. He is
forecasting strong earnings growth for managed care companies from
2006 to 2008, mainly as a result of Medicare drug coverage, which begins
next year and will represent a new line of business for insurers that
administer some of those drug plans.
But Sheryl R. Skolnick, an analyst at Fulcrum Global Partners, said
the new Medicare drug benefit was still "a great unknown opportunity." Companies
that have said they will participate, including Aetna, UnitedHealth
and WellPoint, expect to generate new profits, but, she said, "until
the bids are formulated and awarded, nobody knows how much to expect."
Certainly the new drug coverage presents plenty of risk for the insurers.
They will receive a fixed monthly payment for each Medicare member,
and it will be up to the companies to keep their costs below those
payments.
"There are danger signs out there," said Matthew Borsch,
a Goldman Sachs analyst. He discounts the Medicare potential, except
for PacifiCare and Humana, which already have lots of Medicare beneficiaries
and so are ready to take on more. Medicare will be only "an incremental
positive" for most of the companies, Mr. Borsch said. "It
doesn't transform the earnings picture."
He is more concerned about chances that nonprofit Blue Cross and Blue
Shield companies, many sitting on fat surpluses, will eventually cut
prices and force competitors to follow suit. "We are pointing
to a downside risk in the second half of 2005," he said.
Mr. France at Banc of America Securities is also gloomy. "The
business is going to get more difficult, after five years of expanding
margins," he said. "We think 2006 will be tough."
