OXFORD WOES DRAG DOWN HMO STOCKS

The recent volatility in HMO stocks, while hardly signaling an emergency within the sector, may be emblematic of problems in the managed care industry that might give buyers pause when shopping for a health plan, benefit experts say.

A glimpse of such behind-the-scenes trouble came Oct. 27, when HMO stocks lost value at a rate faster than the general stock market.

The HMO component of the BI Industry Stock Report plunged 18.37% last Monday, while the Dow Jones Industrial average lost 7.2%, or 554.26 points.

Norwalk, Conn.-based Oxford Health Plans was widely seen as the culprit dragging down the overall managed care sector.

Oxford's announcement that accounts receivable were not being collected on time and its prediction of a third-quarter loss coincided with the general marketwide selloff.

Oxford saw its stock price plummet 62.55% on Monday to $25.88 per share from $68.75 the previous close, making it the leading decliner in the BI Industry Stock Report. By Friday, Oxford stock had climbed to only $25.81 per share.

Oxford had predicted a third-quarter loss of between $0.83 and $0.88 per share, citing disappointing revenues, higher costs and having fewer plan members than it had believed. It predicted fourth-quarter net income, though, of $0.05 to $0.27.

Investment firms downgraded Oxford's ratings in response, and other HMOs were dragged down in the process.

The day after the stock crash, a group of Oxford shareholders filed suit against the company in federal court in New York, seeking class-action status. The litigants alleged that Oxford "concealed the adverse impact of a computer crisis which arose from changes made in the company's computer system in September of 1996" and misled them with regard to accounts receivable, membership and enrollment information.

Oxford executives did not return telephone calls.

Managed care market observers said the announcement by Oxford-which had been widely viewed as a model, steady profit producer-led to a brief loss of confidence in all HMOs by investors. Many HMO stocks began to regain value as early as a day after the crash, however, though most remained down at the end of last week compared with the previous Friday close.

Ken Jacobsen, senior vp, national health practice leader for The Segal Co. in Atlanta, called last week's HMO stock drop a correction of a "market inflated by overzealous investors."

Although problems unique to Oxford accounted for its plight, market observers note that related concerns exist for many managed care plans.

The jittery stock market for HMOs can be seen as a reflection of an increased need to appease shareholders coupled with few avenues for gaining additional revenues, said Bob Braddick, a principal at William M. Mercer Inc. in New York. "All these organizations are seeing increasing pressure on profitability," he said. "There's a massive stream (of revenue) that's not sufficient to cover the cost."

Insisting that the experience of Oxford "is probably something that should be put aside," Mr. Braddick said that all HMOs can be viewed as being in distress due in part to compact profit margins, investment in expensive new technology, lags in payment to providers and difficulty in recruiting members in "tapped" markets.

The real Wall Street story for HMOs is not what happened on "Bloody Monday" but the doldrums the industry's stocks have found themselves in for several months, said Richard Hamer, director of Minneapolis-based InterStudy, a managed care research firm. Profits are down across the board, while medical expense ratios are up, he said.

"The event on Monday does not really portend much as far as the long-term performance of HMOs," he said. "Oxford's announcement was bad luck in its timing and created downward momentum for all HMO stocks."

However, if managed care companies, such as Oxford and the managed care units of Aetna Inc. and CIGNA Corp., continue to have disappointing results beyond the third quarter of this year, "it should raise some concerns about how much they can grow and expand," said Rich Stover, a principal for Buck Consultants Inc. in Secaucus, N.J.

Most managed care stocks have reported depressed results in the past few months. Aetna Inc. said it would post a $75 million to $105 million aftertax charge to boost HMO medical claims reserves and would report earnings of 95 cents to $1.10 per share, rather than analysts' estimated $1.31 (BI, Oct. 6).

Some market observers suggested HMOs are going through growing pains.

Stock gyrations should be seen as gastrointestinal troubles of health plans trying to digest other plans, said Mark Hopkins, practice leader for Watson Wyatt Worldwide in Washington. United HealthCare Corp., Aetna, WellPoint Health Networks Inc. and some Blue Cross/Blue Shield plans are "struggling to swallow" acquisitions made over the past 18 months, he said.

Large managed care companies have grown significantly in recent months through acquisitions, but lack the additional claims management expertise to satisfy greater numbers of plan sponsors, said David Ives, president of Salem, Mass.-based North Shore International Insurance Service, a claims management and consulting firm. "They grow and add lives without making the critical adjustments to the infrastructure of staff and computers," he said. "Even the best personnel can be overwhelmed."

Minneapolis-based United HealthCare Corp., which lost 16.6% of its stock value last Monday, "has moved beyond integration issues" and does not see the stock loss as an important long-term event, said Bernard McDonagh, vp of investor relations. United Healthcare stock rose nearly 11% in value the day after the crash.

Although HMOs generally expect to raise rates an average of 6% this year, in other areas they are losing control over their destiny, observers say.

HMOs are losing their ability to control their costs; for example, they have a limited degree of success from utilization management programs, according to Watson Wyatt's Mr. Hopkins. In addition, employees now are demanding access and choice more than ever, causing doctor pools to be virtually identical from HMO to HMO. The result is cookie-cutter plans, he said, that don't offer the employee anything special.