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BusinessWeek: January 11, 1993 |
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Industry Outlook: Health Care
THE FINAL OPTION--RADICAL SURGERY The details of Clinton's package haven't been decided. But key ideas include a basic benefits package for every citizen, a national spending target for health care, and, to make it all work, something called managed competition. Under it, new quasi-public groups would negotiate with providers to get low-cost care for everyone--from individuals to corporations. "The battle is not over whether we will have managed competition," says Representative Jim Cooper (D-Tenn.), who will be influential in passing such a program, "but over who gets to define it." In 1993, debate, speculation, and lobbying over that will preoccupy the health-care industry. NEW MANAGEMENT. Health insurers apparently now see reform as inevitable. "Traditional health insurance is dead," says Thomas Kinser, chief operating officer of Blue Cross & Blue Shield Assn. "It doesn't work, and it isn't affordable." The Health Insurance Association of America, representing 270 insurers, has endorsed some Clinton ideas, such as coverage for all Americans. Even so, the coming debate will be furious because reform will help some parts of the industry and hurt others. Managed-care groups, including health maintenance organizations and some large insurers, already are growing rapidly and should get a further boost. The number of Americans enrolled in hmos may rise 7% this year, to 45 million, up from 28.6 million in 1987. That's a formula for prosperity. Merrill Lynch analyst L.E. Olwell estimates that earnings at U.S. Healthcare Inc., an HMO in the Northeast, jumped 23% last year on a 22% increase in revenues. For the first time, in fact, most workers in midsize and large companies now belong to managed-care plans, according to a recent kpmg Peat Marwick survey. A study by Health Care Investment Analysts Inc. shows why: Hospitals in markets with high managed-care enrollment charge up to 32% less for the same services than those elsewhere. Burkett W. Huey Jr., benefits director for Pepsico Inc., says his company kept growth in medical costs under 5% last year with managed care, and he expects no increase this year. Hospital-supply companies expect to do well this year--with reform or not. The U.S. hospitalization rate, which fell during the recession as patients postponed elective surgeries, is rising again. The number of surgical procedures climbed 2.7% in the first six months of 1992. And that boosts business, since some 70% of supplies are used in connection with operations. Merrill Lynch's Olwell predicts a 36% earnings increase for U.S. Surgical Corp. this year and a 17% jump for Johnson & Johnson. Hospitals won't share in this windfall, however. They soak up 39 superscript 2 of every health dollar, so they're bound to be among the targets of reformers. This will add to the troubles at some big public chains. Already, analysts have lowered their earnings estimates for National Medical Enterprises Inc. after a drop-off in admissions to its psychiatric facilities and investigations of alleged billing fraud. Humana Inc., which plans to split into an hmo and a hospital-management company in March, stopped paying dividends late last year so it could divert nearly $150 million to expand both businesses. The news prompted a 17% plunge in its stock. The outlook isn't rosy, either, for makers of medical devices. Years of lax regulation have ended. And the industry's fat gross margins, which range up to 75%, are an easy mark. Dain Bosworth Inc. analyst Rachael M. Scherer says annualized price increases for medical device makers fell to 5% in 1992, from 8% a year earlier. And some stocks have tanked: For instance, shares of Biomet Inc., a maker of artificial hips, fell 46% in 1992. Health reform may also hurt manufacturers by discouraging rival hospitals from buying duplicate high-tech equipment. 'TOUGH MESSAGE.' The nation's 615,000 physicians will end up on the defensive as well. "The real issue is that 75% to 80% of the costs in the system are driven by physicians," says David M. Lawrence, chairman and ceo of Kaiser Foundation Health Plan Inc., a managed-care pioneer. So their incomes likely will be squeezed in 1993. Last but not least on the list of complainants will be health-care consumers, notably retirees. They are finding that their benefits are being chopped by their old employers, partly in response to a new accounting rule that will require the companies to take a charge against earnings to reflect the value of promised benefits. Says Helen Darling, manager of health-care strategy programs at Xerox Corp.: "Companies can no longer afford to be all things to all people, and that's a tough message coming from paternalistic companies like Xerox." It's also just one more sign that 1993 may mark the end of an era--for patients and health-care providers alike. | |
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