Mid-Atlantic gets high marks

DOWN BUT HARDLY OUT

August 13, 1993|By Patricia Meisol | Patricia Meisol,Staff Writer

A photograph in yesterday's Business section misidentified the person shown. Yesterday's photo was of Charles O. Johnston, executive vice president and chief operating officer of Mid-Atlantic Medical Services Inc. Pictured here is George T. Jochum, chairman, president and chief executive officer of the company.

The regrets the error.

As health maintenance organizations plummeted on Wall Street this week because of worry over health care reform, one of the casualties was Mid-Atlantic Medical Services Inc. in Rockville.

The company, owner of the largest publicly traded HMO based in Maryland with 902,000 members, watched its stock price fall 23 percent since last Friday's close before rebounding somewhat yesterday.

FOR THE RECORD - CORRECTION

But if you didn't participate in this week's sell-off, don't ditch the company now, analysts say.

Mid-Atlantic is one of the most efficient HMOs in the country and if the health care system develops the way the Clinton administration wants -- meaning the creation of national managed-care companies -- Mid-Atlantic stands to be an excellent candidate for acquisition down the road, said Eugene Melnitchenko, health care analyst with Legg Mason Wood Walker in Baltimore.

Legg Mason is neutral on the company, for price reasons, he said. But others say the HMO, which operates as M.D. IPA and Optimum Choice Inc., is undervalued compared with its peers.

Its stock rose $1.625 a share yesterday to close at $23.50, a day after the industry was wracked by recent downgrade recommendations from several New York analysts, including one from Donaldson, Lufkin & Jenrette Securities (DLJ) on Wednesday.

"That spooked the whole industry as far as I am concerned," said George T. Jochum, Mid-Atlantic's chairman, president and chief executive.

Mid-Atlantic "is being recognized as not just a blip, but a continued fine performance year after year," he said. The HMO's stock climbed steadily from the 20s after the company reported two weeks ago that it earned $7.7 million in the second quarter, up 51 percent from the same quarter in 1992. Revenues were $323.3 million, up 16 percent.

The stock closed last Friday at $28.50, more than double the 52-week low of $11.625 a share.

DLJ downgraded its HMO outlook because of an industry newsletter that purported to detail the final Clinton health care reforms. The thinking of DLJ and other analysts was that the reforms will force HMOs to accept all members, regardless of age or health, driving up costs and reducing profits.

Mr. Melnitchenko disagreed, saying increased HMO membership "would be more than enough to offset increases in premiums in the first several years."

Mid-Atlantic has one of the lowest administrative costs in the industry and surprising earnings, Mr. Melnitchenko said. That position would bode well in reform, he said.

The reaction of the market surprised analysts such as Mr. Melnitchenko and Eleanor H. Kerns of Alex. Brown & Sons.

"The problem with this is that it is in large part psychological and can feed on itself," said Ms. Kerns, who said she had not expected the severity of the reaction. The situation differed from February when HMO stock prices fell rapidly, she said, because many assumed at the time that Mr. Clinton's health care reform would get passed during his honeymoon phase. More people now believe the shape of the reform is up for grabs.

More shocks are possible as news of the reforms trickles out, Ms. Kerns said. But she predicted it would end when investors recognize that not only is health care reform a drawn-out political process, but the market is evolving in ways that might preclude reform.

"We're already seeing that -- costs are down," she said.

Before Wednesday's sell-off, HMO stocks had been on the rise. One of the fastest-growing HMOs -- Oxford Health Plans -- was at $40 a share in April and hit a high of $80, before tumbling 11.6 percent this week. It was down $8.25 a share to $62.75 Wednesday and closed yesterday at $61.50.

Ms. Kerns viewed Wednesday's selling as a panicked reaction that was out of sync with the slow and complex nature analysts have come to expect with health care reform.

But Michael Meek, health care analyst and vice president at Ferris Baker Watts Inc., said the decline had more to do with the recent upward swing in prices. "I think the group was right for a sell-off anyway," he said. "This was just a trigger."

Mr. Meek said the items in the purported final Clinton plan really weren't new.

"The HMOs are still the last best hope at this point," he said. Mr. Meek said he would concentrate on HMOs with the leanest cost structure per member, and that included Mid-Atlantic, which, he said, had the lowest costs of the 18 companies he follows.

U.S. Healthcare, which recently entered Maryland, could be more efficient but it hasn't been "provoked" by the marketplace to improve, Mr. Meek said. That stock has performed "miserably," he said, down 30 percent this year.

In contrast, Mid-Atlantic has doubled in price but remains undervalued compared with others in the industry, he said.

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