MAMSI profit up but subpar Rockville company joins ranks of HMOs with shrinking gains

Managed care

August 13, 1998|By M. William Salganik | M. William Salganik,SUN STAFF

With the announcement of a disappointing second quarter yesterday, Mid Atlantic Medical Services Inc. of Rockville joined a number of HMO operators that have reported poor results over the past few days.

HMO stocks have taken a beating. The Morgan Stanley Health Care Payer Index, which includes a dozen managed-care stocks, has lost about a third of its value since July 6. During that time, stocks in general have been down but the Dow Jones industrial average has dropped less than 6 percent.

Analysts say the health maintenance organizations can improve their margins but are unlikely to return to the fat profits of the early to mid-1990s, when they were growing rapidly by taking business from indemnity insurers.

MAMSI reported earnings of $3.6 million, or 8 cents a share, yesterday. That was an improvement from the $2.7 million, or 6 cents a share, recorded in the second quarter of 1997. But it fell well short of the 14 cents a share analysts had projected. Revenue for the quarter was $294.2 million, up 4.2 percent from $282.4 million in the corresponding quarter last year.

The lower-than-expected MAMSI earnings were not a surprise. The company announced last week that it would post a disappointing quarter. Between MAMSI's earnings warning and its quarterly report yesterday, other managed-care companies announced similar news: United HealthCare Corp. took an unexpected $900 million charge Aug. 6. Its stock plunged 28 percent in a day, losing $2.9 billion in value. Monday, United scuttled its plan to acquire another large HMO company, Humana Inc.

Troubled Oxford Health Plans Inc., once a Wall Street favorite, reported Tuesday a second-quarter loss of $507.6 million.

Foundation Health Systems Inc. said Tuesday that its second-quarter profit was 43 percent lower than in the corresponding quarter last year. It blamed the thinner margin on increasing costs of delivering care, particularly to members of its Medicare HMO program.

As the marketplace has adjusted to managed care, "the purchasers are more aggressive," with employers threatening to switch plans if premium increases are too high, said health economist Paul B. Ginsburg, president of the Center for Studying Health System Change in Washington.

At the same time, said Douglas B. Sherlock, senior health care analyst at Sherlock Co. in Gwynedd, Pa., drug prices are rising and "doctors and hospitals have banded together and are negotiating a little tougher" with the HMOs.

The industry is not in an unusually bad period now, Sherlock said. The average profit margin in the most recent period was 1.1 percent, he said, compared with a loss of 0.5 percent in the year-earlier period.

Of the 17 companies tracked by Pulse, a newsletter published by Sherlock, eight had better profit margins, eight had worse margins, and one had the same margin as in the year-earlier period.

Ginsburg said the recent stock price drop means "the market is giving back some of the increases earlier in the year that weren't justified."

He said Wall Street had been expecting premium increases of 5 percent to 6 percent for 1998, but the average increase barely exceeded 3 percent, probably not enough to cover increased medical costs.

Eleanor H. Kerns, an analyst at BT Alex. Brown, said the stock downturn also reflects "the anti-managed care sentiment which is plaguing the industry." Some investors consider new government requirements for HMOs likely, she said, "and whenever there is the potential for regulations adding to costs, that is not a desirable basis for investment."

Also making medical costs more difficult to control, Kerns said, is consumers' desire for health plans that offer more flexibility.

"Plans have to offer more choice, but that's a higher risk for the plans to bear, and many traditional HMOs don't know how to price a product like that," Kerns said.

She said she expects another round of premium increases to improve profitability.

Sherlock said margins in the fairly recent past -- as much as 8 percent in 1994 -- reflected the fact that HMOs could under-price indemnity plans by about 20 percent, enabling them to gain business rapidly while maintaining comfortable margins. Now, the competition is other HMOs, and price competition keeps margins thin, "in great years, 3 percent," he said.

"I don't know if today's profits are normal," Ginsburg said, "but I don't think we'll see the profits of the early '90s again."

Pub Date: 8/13/98

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