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HMOs in US to
Show Medicare Positions
Newsday
October 12, 2005
Investors in managed-care companies will be studying third-quarter earnings reports to find out which ones will pick up market share in 2006 and which will do the best under the federal prescription drug law that begins in January.
JPMorgan analyst Scott Fidel expects larger companies _ such as UnitedHealth Group Inc., spending $8.1 billion to buy PacifiCare Health Systems Inc.; WellPoint Inc., planning to buy WellChoice Inc.; and Aetna Inc. _ to take market share on 2006 national accounts from smaller regional players.
Fidel, whose company has an investment banking relationship with a number of HMOs, expects larger HMOs will use their quarterly reports to indicate they are positioned well when it comes to Medicare prescription drug business because of the strength of their brands.
New Medicare drug benefits, which begin in January, allow the elderly and the disabled who are eligible for Medicare to sign up for government-subsidized drug plans offered by insurers such as UnitedHealth, WellPoint, Humana Inc., Louisville, Ky., and Aetna. The benefits are part of the "Medicare Advantage" plan, a privately administered, health maintenance organization version of Medicare. About 40 million people currently are covered by Medicare.
One of the most anticipated events of the upcoming season for managed-care companies is Humana's conference call, Fidel said. At that time the company is expected to provide financial grounds for prices on its new prescription-drug policies.
Humana's plans are generally cheaper than the competition. The company reports earnings on Oct. 31.
"Humana's low-cost plans are likely to attract a disproportionate share of low-income individuals (besides those eligible for both Medicare and Medicaid) who tend to be a less favorable risk, i.e., sicker," Credit Suisse First Boston analyst Patrick Hojlo wrote in a research note.
Humana Market President for North and Central Florida Scott Latimer said his company's experience with the low-income elderly directly contradicts Hojlo's contention that poor seniors and Medicare recipients are "sicker" than others.
"We don't feel we're shooting in the dark" with the pricing, Latimer said. "The large majority of individuals insured through our individual HMO make under $20,000 a year."
On the whole, JPMorgan's Fidel expects few surprises in third-quarter results from the big players.
In September, WellPoint, Cigna Corp., Philadelphia, and UnitedHealth set the tone for the sector by reiterating prior financial projections.
Cigna backed its projections for 2005 enrollment and adjusted earnings, excluding Medicare expansion expenses, as it continues a turnaround.
Investment in new Medicare products will likely knock a lump out of the corporate bottom line.
Another area to study in the upcoming financial reports will be how the investments are divided between the third and fourth quarters, Fidel said.
Humana, for example, will exceed its original 2005 budget considerably, mostly due to increased staffing and other measures for increased Medicare business, but it hasn't said how the spending breaks down.
Generally, most of the companies were "disciplined" with their pricing during the third quarter, passing on medical costs that rose about 8.5 percent for the period, Fidel said.
Including investment in the expansion of Medicare business, Fidel expects per-share operating earnings to rise 9 percent, on average.
Excluding the Medicare Advantage outlays, Fidel expects operating earnings per share to grow 16 percent, on average.
Omitting the recovering Cigna, Fidel said the average operating earnings will rise more sharply.
Copyright 2005 Newsday Inc.
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