Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: FRIDAY, July 8, 1994 TAG: 9407280004
SECTION: EDITORIAL PAGE: A11 EDITION: METRO
SOURCE: JAMES K. GLASSMAN
DATELINE: LENGTH: Long
Many financial analysts doubt that Congress will approve significant reform before the October recess. But Wall Street seems to feel that even if reform does pass, market forces that are already at work - rather than new government policies - will primarily shape the way Americans get their medical care and pay for it in the future.
The most powerful of those forces is the pressure to deliver good service at low cost, and the big winners will be well-run hospital chains and health-maintenance organizations.
Among those companies, according to Wall Street analysts, are OrNda HealthCorp., a Nashville-based hospital management firm; Community Health Systems, which operates rural hospitals; Mid Atlantic Medical Services Inc., an HMO with heavy concentration in Maryland; Oxford Health Plans, an HMO that serves New York; and Healthsource Inc., based in New Hampshire.
These companies are beneficiaries of a classic shakeout that is forcing poorly run hospitals and private medical practices - and there are lots of them that fit this description - to merge or die. Another result, further down the road, may be to make insurance companies, which add a layer of cost but contribute little service, marginal players in the health-care game.
What the thriving survivors have in common is nothing more magical than great management and a clear understanding of their customers ... er, patients.
For example, Robert Mains, an analyst with First Albany Corp., points out that Healthsource specializes in secondary markets - Savannah, rather than Atlanta. Most people in these markets have never used HMOs, have barely heard of them. But Healthsource builds confidence in HMOs, signs deals with the best hospitals and attracts leading doctors. The patients follow, and the company is growing at 30 percent a year.
In fact, while policy wonks in Washington chatter on about the health-care crisis, companies like Healthsource and OrNda are actually solving it. They have no choice: The businesses that pay more and more of the health-care bills in this country are at last demanding value for their money. So are the states, which are stuck with Medicaid bills.
``These changes are coming very rapidly - with or without anything coming out of Washington,'' says Jeffrey Villwock of Johnson Rice & Co., who was recently rated the top medical stock analyst by the Wall Street Journal.
``The Clintons,'' Villwock says, ``lit a fire under a process that was already going on.''
That process has slowed the rise in health costs dramatically. The consumer price index for medical care in May was up only 4.6 percent compared with a year earlier, according to the latest figures from the Bureau of Labor Statistics. That number continues a trend that began in 1990, when prices rose 9.6 percent. In 1992, the increase was 6.6 percent, and in 1993 it was 5.4 percent.
The market did get a bad scare last year, when President Clinton and Hillary Rodham Clinton blasted the health-care industry in speeches. Talk of price controls grew intense, and the public supported the Clinton health plan last September by a margin of nearly 2 to 1.
But now, says Villwock, ``the whole atmosphere has changed.'' Polls show a plurality of Americans opposing the Clinton plan, and a June 10 to June 14 NBC News/Wall Street Journal survey found that 57 percent of those polled want Congress ``to continue to debate the issue and act next year,'' vs. 37 percent who want a bill before the 1994 elections.
Earlier, members of Congress worried that if they didn't pass legislation this year, their constituents would punish them at the polls. That pressure has diminished.
If a bill does pass, price controls are highly unlikely, as are the powerful regional health-purchasing alliances the Clintons first proposed. It appears that most health-care companies - with the exception of pharmaceutical firms, which remain favorite whipping boys - have little to fear from Washington. But if the future appears so rosy, then why are health stocks still depressed? Oxford and OrNda are nearly 40 percent below their 52-week highs; Community trades at an anemic multiple of earnings.
One big reason, says Mains, who ranked second to Villwock in the Journal's ranking of medical stock pickers, is that investors don't like uncertainty. ``There will continue to be gyrations in the market as this stuff is debated,'' he says.
Eleanor Kerns, a highly rated analyst with Alex. Brown & Sons Inc. in Baltimore, agrees. The market's worst fear, ``a very liberal plan with lots of intervention and government controls,'' almost certainly won't come to pass, she says. Still, investors are nervous.
Kerns, however, believes that whatever Congress does, good HMOs such as Oxford, United Healthcare and PacifiCare Health Systems will get a boost. ``If nothing happens [in Washington], then what is happening in the marketplace will continue,'' she says. ``If something happens, it could have a positive effect. The damn thing would be over. Let another industry have the headlines for a while.''
In fact, the best strategy for the president and the first lady might be to acquiesce in a pallid version of health-care reform that could pass both houses - perhaps a pared-down version of the bill that the Senate Finance Committee passed last week. The marketplace itself would continue to hold costs down and spread benefits to more Americans, and the Clintons could declare victory as satisfying statistics emerge.
James K. Glassman writes on financial affairs for The Washington Post.
The Washington Post
by CNB