|
| Sample Newsletters | MarketPlace Publications & Meetings |
|
AIS's Health Business Daily
Featured Story May 2, 2008 First-Quarter 2008 Was Worst Stock Performance for Public Health Plans Since Late-1997Reprinted from HEALTH PLAN WEEK, the industry's leading source of business, financial and regulatory news of health plans, PPOs and POS plans. By Steve Davis, Managing Editor, (sdavis@aispub.com) For publicly traded health plans, the first quarter of 2008 will go down as the worst single quarter for stock performance in more than a decade, equities analysts say. While the Standard & Poor's (S&P) 500 stock index is down 10% for the quarter, the managed care sector is off 35%. Centene Corp. and UnitedHealth Group — which will kick off the earnings season on April 22. — are each expected to lower their full-year earnings projections. Other health plans will likely follow suit with negative earnings revisions for the remainder of 2008. The anticipated revisions, analysts say, reflect expectations of a higher commercial medical loss ratio and reduction in investment income (due to recent interest-rate cuts). Aaron Vaughn, a securities analyst in the St. Louis office of Edward Jones, says health plan stocks are trading at "historic lows" relative to their price-to-earnings (P/E) ratios. The next worst quarter was the fourth quarter of 1997, "when the sector underperformed the S&P 500 by 22.6%," adds Stifel Nicolaus equities analyst Tom Carroll. Back then, he tells HPW, there was an abundance of managed care companies, and they competed largely on price to improve market share. While investors rewarded firms that successfully grew membership, some health plans reduced prices at their own peril, and ultimately failed in that strategy because premium revenue wasn't enough to cover medical costs, he says. Much of the first-quarter deterioration, however, didn't occur until March 10, when WellPoint, Inc. shocked investors by lowering its full-year 2008 earnings per share expectations. Humana Inc. followed the next day with its own revision, citing different reasons. While Aetna Inc. and CIGNA Corp. responded to those revisions by reaffirming earnings forecasts, UnitedHealth Group, Health Net, Inc. and Coventry Health Care, Inc. have since released statements that fell short of reaffirming earlier forecasts. Health Net, for example, said in a recent Form 8-K filing with the Securities and Exchange Commission that its earlier guidance was not to be relied upon. Carroll explains that the market responded "violently" to WellPoint's announcement because the insurer has traditionally been considered the safest stock in the sector. "A Blue Cross and Blue Shield company was just not supposed to experience the types of mistakes that it reported," he asserts. While the "challenging operational environment" WellPoint officials outlined in their guidance revision was nothing new to the industry, the announcement amplified the sense of operational challenges the managed care sector has been feeling the past few years, he adds. United, Centene Expected to Revise Forecasts Carroll predicts that United and Centene will lower their earnings forecasts on April 22. Perhaps Health Net and Coventry will reduce their numbers, too, he says. "It's somewhat expected," he says. "If your stock is down and the market is already pricing your business as if the numbers have already come down, why not give yourself a little more wiggle room in earnings?" In her April 16 note to investors, Morgan Stanley analyst Christine Arnold said her firm has lowered its earnings projections for United based on "environmental as well as execution-related challenges." Along with an anticipated rise in the Medicare Advantage (MA) medical loss ratio, she said stand-alone Medicare Prescription Drug Plans are likely to be less profitable due to United's "generous formulary." The richer formulary, she suggested, could lead to adverse selection by attracting seniors who are high utilizers of prescription drugs. Vaughn says that United will likely lower its full-year guidance slightly. "If they bring it down by only a couple of pennies [per share], the market is likely to react favorably," he says. Arnold suggests that United could improve its medical cost trend by as much as 200 basis points (2%) by improving claims accuracy. This is not "an opportunity shared by [United's] peers," she wrote. Medical loss ratios have been flat for the last three or four years for the industry as a whole, which means that margins are not expanding. Premiums paid by employers and individuals "have just barely covered medical cost trends," Carroll says. "And that has been the environment the past couple of years. Analysts agree that enrollment on the commercial side, for most health plans, is flat or declining and premium yields are suffering. Aetna appears to be one of the few carriers that has been successful in growing its commercial membership. P/E Ratios Plummet to Single Digits As of the end of March, the mean estimated P/E ratio for 2008 was 8.6 times, according to data supplied to HPW by Banc of America Securities. That number is down dramatically from the 13.9 reported on the same date a year ago, and is less than half the 18.4 reported at the end of March 2006. Carroll says that while the P/E ratio will likely creep up a bit over the next 10 months, health plans probably won't see a P/E much above 9 or 10 this year. Analysts say the lower P/E, however, isn't likely to help or hinder acquisitions in the sector. While Aetna now has a higher P/E multiple than does United, which historically has not been the case, a higher P/E alone isn't likely to encourage or deter acquisitions, they say. "While [P/E] multiples are lower, everyone's multiple is lower, so it doesn't impact the relative differences in multiples all that much," says Oppenheimer & Co. equities analyst Carl McDonald. One exception, he adds, is WellPoint, which he says is among the health plans least likely to pursue a merger or acquisition this year. WellPoint "will likely focus internally on fixing its issues rather than on a deal of any significance," he tells HPW. Health Plans Turn to Government Payers With growth in the commercial segment stagnating, equities analysts predict health plans will turn more to government payers. "It is our opinion that [health plans] are going to be much bigger government contractors," Carroll says. "Medicare, Medicaid and state health initiatives is what is going to drive incremental enrollment growth and earnings over the next several years. Medicare will be a cornerstone of that growth." But, he adds, "the jury is still out" about what such a trend will mean for earnings. While stock prices for Medicaid HMOs, such as AMERIGROUP Corp., Centene and Molina Healthcare, Inc. have come down along with those for health plans with large commercial memberships, Carroll says their prices could be artificially low. "The Medicaid HMO model is completely different from WellPoint's commercial business," he says. Although Medicaid HMOs are not immune to problems, and even have a population more at risk for influenza-influenced utilization increases, they don't face the same challenges. "The Medicaid HMOs could be the best stocks in the sector for the rest of the year. Equities analysts agree that the volatile sector could be good news for long-term investors who are willing to hang onto the stock for three to five years. Vaughn says "this is an attractive point to get into the industry." Vaughn, who covers WellPoint, United and Aetna, says he has buy ratings on all of them. Wall Street's already
low expectations for the sector, he predicts, could have a favorable
effect on stock prices if those revisions aren't as bad as investors
anticipate. "We will need a couple of quarters to build back the
confidence among investors," he adds.
|
| ||||||||
