Analysts cool toward managed care stocks

Financial analysts are downgrading managed care stocks after investment firm Goldman Sachs lowered its outlook on the industry.

Goldman Sachs analyst Matthew Borsch, in a report released in January, wrote that "both [stock price] valuations and profit margins appear to be at peak levels."

It is not yet known how a reduced profit outlook for health plans might affect reimbursement of physicians, who have pointed out frequently that plans have suppressed reimbursement even when finances were strong.

Charles Y. Thomason III, president of Medical Management Associates, an Atlanta-based practice management consulting firm for physicians, said health plans shouldn't look to physicians to maintain profit levels.

"We have more and more doctors who are dropping out of their practices earlier," Thomason said. "From a pricing standpoint, physicians' fees have been driven to levels that threaten their viability, especially smaller practices. As fees decrease, doctors are having to work harder and harder to make the same amount of money."

Borsch's report also predicts an end to plans "squeezing the lemon" through large-scale mergers. He wrote the industry is reaching the limit for large-scale acquisitions based on the potential for antitrust challenges because of high market concentration and outcries from the medical establishment. The AMA and state medical societies have spoken out against such mergers, saying ever-larger health plans have too much market power over physicians and patients.

Borsch cited an increasing tendency for mergers to be approved only with conditions, such as those in the recent UnitedHealth Group-PacifiCare Health Services combination. The Justice Dept. and Colorado and California regulators approved the merger with strings attached.

For example, federal regulators said the newly merged company must sell operations in Boulder, Colo., and Tucson, Ariz., and pull out of a deal allowing United to have access to WellPoint-owned Blue Shield of California's physician network. It was only the second time out of an estimated 400 health plan mergers that federal regulators did not approve a deal as constructed.

Borsch also predicted price competition among managed care companies, absent in recent years as plans have pushed through annual premium increases of 12% to 15%, likely will increase because of enrollment growth goals of 2.5 million members this year. Borsch said that figure might be unrealistic when actual growth in 2004 and 2005 never reached that level.

Borsch also said for-profit insurers face pricing pressures from the nonprofit Blues, which are seeking lower profit margins to slow the growth of excess capital.

WellPoint spokesman Jim Kappel said the company doesn't comment on analyst reports. But he said WellPoint is forecasting 2006 earnings per share of $4.51, 15% higher than the company's estimated 2005 earnings of $3.93 per share.