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Industry Outlook 2001 -- Life Science

Health Care

The year 2000 finally brought some financial relief to the beleaguered managed-care industry. Thanks to significant increases in health-care premiums and massive cuts in administrative expenses, the industry turned a profit for the first time in years. Analysts now forecast a rosy 2001, with one big caveat for the weaker, less popular health insurers: If they don't become more consumer-oriented, they will either fold or be merged into larger companies.

In 2000, health maintenance organizations took advantage of a strong economy and a tight labor market that fueled demand for health-care coverage, whatever the cost. Overall, the plans were able to raise premiums by 8% to 9%--and they will likely charge an additional 10% to 12% in 2001. Those bigger premiums yielded fat profits for managed-care companies in 2000--and large returns for their Wall Street investors. Gary M. Frazier, an analyst with Deutsche Bank Alex. Brown Inc., estimates that managed-care stocks are up 80% for 2000 and trading at 17.5 times projected earnings.

Rising premiums are just one reason for the renewed vigor of many health-care insurers. Frazier notes that the industry is doing a better job containing costs, especially those that arise from expensive prescription medicines. For instance, many insurers have instituted a three-tier co-pay system that charges $5 for low-price generic drugs, $15 to $20 for approved brand-name medicines, and up to $40 for expensive drugs that are not covered by the health plan's formulary. Charles D. Baker, chief executive of Harvard Pilgrim Health Care, a 900,000-member insurer in the Boston area, estimates that his company has cut its drug spending in half since it implemented a three-tier plan last January.

According to Todd B. Richter, analyst with Banc of America Securities, such measures are a step in the right direction but not a panacea. "Most of the time, when you aggressively raise premiums, the people who leave you are the younger, healthier ones," he points out. Rate increases also are unlikely to solve problems at already struggling outfits, such as PacifiCare Health Care Systems (PHSY) and Aetna U.S. Healthcare (AET). So dire are the conditions at Aetna that on Dec. 18, the company announced it would raise premiums 11% to 13%, jettison 13% of its workforce, and shed 2 million customers.

"These companies have done little to address problems endemic to the health insurance sector," says Richter. Patients continue to demand more flexible--and more expensive--health plans, while hospitals and doctors rebel against inadequate payments. Meanwhile, employers are seeking more cost-effective solutions that include company-based doctor and hospital networks and group purchasing coalitions. In coming years, the challenges for insurers will mount as they deal with a growing population of elderly people requiring more expensive types of treatments.NEW TOOLS. To improve relations with their customers, the most enlightened managed-care companies are investing heavily in new technologies that will improve service and potentially provide patients with better medical care. Web-based tools that allow patients to check on the status of a claim or find a specialist in their neighborhood are starting to catch on. Empire Blue Cross & Blue Shield, for one, is developing new tools that allow the user to click on a computer screen icon, insert a phone number, and receive live help from a representative within seconds. Cigna (CI), Oxford Health Plans (OXHP), and United Healthcare Group (UNH) also have significant Web initiatives. "Our goal is to improve the health-care experience of the consumer," says Jay Silverstein, chief marketing officer for United Healthcare. And indeed, last year--at a time when most managed-care companies were losing members--United managed to sign up more than a million new patients.

To be sure, the high-flying technology installed at Empire or United isn't cheap. Industry execs estimate these new Web-based solutions cost $200 million to $300 million. Still, it seems that managed-care companies have little choice but to invest in more consumer-friendly solutions. Their continued survival depends on it.By Ellen Licking in New YorkReturn to top


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