HMO cost controls faulted Earnings woes mount for Mid Atlantic

July 10, 1996|By M. William Salganik | M. William Salganik,STAFF WRITER

Mid Atlantic Medical Services Inc. (MAMSI), which Monday said that it expected to report a second-quarter loss -- its first in years, is caught in a squeeze typical of the health maintenance organization industry, analysts said yesterday.

However, they said, Rockville-based MAMSI's problems have been exacerbated because at a time when price competition has meant flat premiums, the company has not been able to control medical costs as well as have some of its competitors. Monday, MAMSI said that its medical loss ratio -- the percent of premiums it spends on medical care -- could hit 95 percent, compared with 83 percent for the second quarter last year.

"I've never been convinced this is a company that has its arms around medical cost control," said Gary M. Frazier, a managing director of Bear Stearns in New York, who yesterday cut his recommendation on the stock from "neutral" to "sell."

In the first quarter of 1996, MAMSI's monthly premium per member averaged $127.55, up just 0.9 percent from the end of 1995, Paul Dillon, senior vice president and treasurer, said yesterday. But medical costs per member spiked to an average of $108.43 a month -- a leap of 4.7 percent.

MAMSI will be raising premiums 5 percent to 7 percent, Dillon said yesterday, although that might slow growth in membership. Dillon said MAMSI had seen some competitors raising premiums also. But Douglas B. Sherlock, senior health care analyst for the Sherlock Co. in Gwynedd, Pa., a company advising institutional investors, said that of 21 publicly traded HMO companies he follows, 11 reported lower premiums this year than last year.

On the cost side, Dillon continued, MAMSI would be "beefing up the case management area," working with patients to keep them well, although these preventive efforts might not be reflected in lower costs for a year or more.

After the stock market closed Monday, MAMSI announced that it was projecting a loss of 5 cents to 10 cents a share -- $2.4 million to $4.8 million -- for the quarter ending June 30. Analysts had been estimating earnings of between 13 cents and 26 cents a share, and MAMSI reported earning 29 cents a share for the corresponding period last year.

After dropping as low as $12.13 a share -- a 52-week low -- MAMSI stock closed yesterday at $13.75, down 50 cents for the day.

The blow to stock prices may have been softened by a disappointing first quarter this year -- earnings of 25 cents a share, down 30.6 percent from 36 cents last year -- and by general conditions in the industry.

"We're in the midst of a Darwinian shakeout," Frazier said. "Some will survive, but I don't think anybody will get out unscathed. In the first quarter, nearly everybody missed their consensus expected earnings."

Profit margins in the industry, Sherlock said, have gone from around 9 percent a year ago to about 3 percent now.

MAMSI reported that it is actually losing money in its Medicare business.

"That's not unusual when you're working from a small base," said Eleanor H. Kerns, an analyst with Alex. Brown & Sons. "This is a new product for them, and it's generally not profitable until you have a critical mass."

Medicare, the federal insurance program for people over 65, accounts for just 1 1/2 percent of MAMSI's HMO business, Dillon said.

Of its 750,000 HMO members, he continued, about 14 percent are from Medicaid (state administered programs for low-income patients), and about a quarter are federal, state or local government employees.

With 20 to 25 percent of the Maryland managed-care business, Dillon said, MAMSI is No. 2 in the state after Blue Cross and Blue Shield of Maryland. It is strongest in Montgomery and Frederick counties.

Although analysts said MAMSI, with a strong position in its market, might be an attractive takeover target in an industry that has undergone substantial consolidation, Dillon said, "we are not actively pursuing the selling of the company as an option."

In addition to its HMO members, MAMSI serves 900,000 members in preferred-provider plans for which employers or labor unions are self-insured. For this part of the business, MAMSI negotiates reimbursement rates with doctors and other providers, but is not at risk for medical care, collecting an administrative fee.

Pub Date: 7/10/96

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