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Industry Outlook 1999 -- LIFE SCIENCES

Health Care

Can managed care finally make some decent money in 1999? After a three-year profit drought, indications are promising. Most health-maintenance organizations are holding the line on medical costs. They've pulled out of Medicare in weaker markets. And they're winning more than nominal commercial premium increases--almost unthinkable in recent years.

Operating margins remain thin, typically 4% or less, and HMO stock multiples won't nearly approach their levels of 1995. Still, Wall Street expects net profit increases of 15% to 20% this year from all the giants--Aetna, Humana, Pacificare Health Systems, Wellpoint Health Networks, and United HealthCare.

Such relative bounty is made possible by the emergence of long-absent pricing discipline. Nationwide, insurers' premium increases to large employers should average 5% to 7% this year, up from 3% for 1998. Some, such as Indianapolis-based Anthem Insurance Cos., say they've won average hikes of 10% or higher. Increases are even steeper in the small-group market.

At the same time, HMOs are keeping costs down. Although double-digit increases in pharmaceutical expenses will persist, insurers will perhaps pay physicians only 4% more than in 1998. Many hospitals will get even smaller hikes. "It's going to remain difficult for us to generate anything in the way of significant price increases," says Eric R. Wagner, vice-president at Helix/Medlantic Healthcare Group, a newly merged combine of seven hospitals around Washington.PULLING OUT. Hospitals will win modest relief from Medicare. The federal progRam, which typically accounts for 40% of hospital revenue, will grant a 0.5% rate increase after holding pay flat in 1998. HMOs, too, should see healthier returns from their Medicare operations--mostly because they've withdrawn from markets where pricing caps and regulations made their operations untenable.

The dominant industry dynamic, however, remains consolidation. Aetna Inc.'s Dec. 10 announcement that it would pay $1 billion for Prudential Insurance Co.'s massive and mediocre health business raised the ante, as insurers, hospitals, and doctors race to win leadership in local markets."We're still acquiring. The ground rules are the same," says Alan B. Miller, CEO of Universal Health Services Inc., the third-largest hospital operator.

Rule No. 1: Size truly matters. The continuing arms race, though, concerns some health executives and analysts. Bigger insurers, hospitals, and physician groups, they note, don't necessarily serve patients better. And heightened competition could make this year's profits an anomaly. "I don't think health care is a high-margin business," says Francis J. Crosson, executive director of Kaiser Permanente Federation, part of the big not-for-profit Kaiser HMO. "I don't think the country wants it to be."By Keith H. Hammonds in New YorkReturn to top

TABLE

Positives and Negatives

POSITIVES

-- Insurers will win higher premium increases, especially from smaller customers

-- Demographics and managed-care pressures favor nursing homes, assisted-living centersNEGATIVES

-- Medicare cutbacks continue to eat into revenue growth throughout the industry

-- Giant physician-management companies haven't found a viable formulaReturn to top

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