Depressing trend for mental health insurer

July 14, 2002|By JAY HANCOCK

UNTIL WASHINGTON develops a national Mental Health Index, we'll have to estimate U.S. sanity by examining the financial reports of Magellan Health Services. They're depressing.

Magellan, based in Columbia, is the country's biggest mental health insurer, covering one in four Americans. Since Sept. 11 the rate of increase in Magellan clients seeking psychotherapy has at least doubled and shows no sign of diminishing, a trend that seems to reflect the country's spirits and doesn't bode much good for Magellan, either.

Predictably, the weeks immediately following the terrorist attacks showed a sharp spike in couch sessions and ingestion of psychotropic drugs.

U.S. sales of the antidepressant Zoloft were 9 percent higher last fall than in the corresponding period in 2000. Magellan's cost of care for the period increased 6 percent, a rise caused almost entirely by growing queues of patients, not higher prices for pills andcounseling, a company spokeswoman says.

What nobody expected was that Americans would continue patronizing mind doctors in great numbers once the initial shock of the terrorist outrage abated. In a statement he might now regret, Magellan boss Daniel S. Messina said in October that "we do not anticipate that there will be an enduring effect from these traumatic events."

In fact, the use of mental-health services has continued to rise sharply. Magellan's spending on care stayed high through the end of the year. Then it went up some more.

Until September, Magellan's outlays for psychotherapy, Prozac, psychiatric hospital stays and the like had been increasing by 2 percent to 3 percent a year. Since then, costs have risen at a 6 percent to 8 percent annual rate, a spokeswoman says.

Instead of a decline in psychiatric succor as the terrorist horror receded, "we really felt the impact" of increased patient care in this year's first quarter, months after the attacks, says Melissa Rose, Magellan's vice president of investor relations.

She declined to spill second-quarter results but added, "The 6- to 8-percent trend that we had been seeing - we anticipate that that will continue."

Exactly what's bothering America is necessarily unclear.

Magellan believes the rising incidence of psychological treatment stems not so much from Sept. 11-related stress but from the free advertising that the attacks generated for caregivers. As America grieved, employers promoted mental health benefits, broadcasting the message that help is here for whatever distresses you.

For sure, people still worry about security. But Magellan's historical data suggest that employees also tap mental health services when the economy wobbles, as it is doing now. Certainly, the bum stock market is a good reason for seeking a serotonin fix and an empathetic ear.

Perhaps Richard C. Blum, husband of California Sen. Diane Feinstein and founder of San Francisco's Blum Capital Partners, feels the need for therapy right now. At last count, his firm owned 17 percent of Magellan's stock, which has fallen from more than $14 a share last summer to less than $2.

The stock's struggles are a direct result of the long lines at the psychology counter. As Magellan's costs soared, its profits and cash resources shrank, prompting analysts to speculate about a "restructuring" that could shift chunks of ownership from shareholders to creditors.

But even creditors are concerned. Magellan's senior notes, which would be relatively high on the reimbursement ladder in the event of a bankruptcy, have been selling for less than 80 cents on the dollar, according to Edward Mally, a junk-bond analyst for CIBC World Markets. That's a sign that investors don't expect to be paid back the full face value of the loans.

Less-senior Magellan debt has been trading for less than 50 cents on the dollar, Mally says.

In any event, Magellan should endure; its huge market share in pscyhotherapeutic coverage will see to that. But it is hard to imagine how the company will avoid a financial overhaul if current patient trends continue.

Only about a third of Magellan's employer contracts come up for renewal next year, which limits its ability to raise premiums and revenue. Standard & Poor's just downgraded its debt. As a subcontractor to Aetna, which has been dumping unprofitable contracts, Magellan has been losing members.

And the company could take a new hit this quarter. New accounting rules require corporations to immediately write down the value of assets known as "goodwill" if the firms overpaid for past acquisitions. Without going into too much detail, it's a decent bet Magellan will eat a plate of goodwill crow, which would be subtracted from earnings and its balance sheet.

The national mood and the fight against rising medical costs are both going against Magellan. Hope it has a good employee assistance program.

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