More MS news articles for April 1999

Healthcare industry getting sicker

Rising financial pressures put the squeeze on provider stocks

By Jerry Cobb

With governments cutting back on Medicare reimbursements, profits at healthcare companies are getting squeezed. Industry analysts say there's no easy cure in sight.

LOS ANGELES, April 16 -  Healthcare stocks have been on the injured list throughout much of Wall Street's latest rally. The sector, which was in the pink just a few years ago, is succumbing to a debilitating financial environment. And the symptoms appear to be getting worse.

NOT TOO LONG AGO, investors were throwing money at healthcare companies, lured by the promise of managed care. The idea was that by managing doctors and hospitals, these companies could control spiraling healthcare costs and turn a profit. But the reality hasn't turned out that way.

Take the case of Alabama-based MedPartners - the latest casualty of a financial squeeze that's slowly choking the healthcare business. Regulators in California recently seized the company's network of health clinics after it ran into financial troubles. Dr. Marcy Zwelling, a former member of the network, wasn't surprised.

"I think that we'll see many more of these companies having problems, again," she said, "because there's not enough money in the system."

MedPartners is not an isolated case - it's the latest in a string of business failures rippling through the nation's health care system. In California alone, it's estimated that 50 to 90 percent of all medical providers in the state are having financial difficulties.

A Bankruptcy Case a Week

Sam Maziel is an attorney with Pachulski, Stang, Ziehl and Young - the nation's twelfth largest bankruptcy firm. He says cases involving healthcare companies are cropping up at a rate of about one a week.

"There's been tremendous pressure on all the layers in the health care system to provide the same amount of services, or better services or better tests every year and do it for if not less money, no more money than we paid the year before," said Maziel.

The pressure is primarily coming from government, the largest purchaser of medical services. As part of the 1997 balanced budget agreement, federal and state governments are cutting the amounts they pay healthcare providers to treat elderly patients under Medicare.

To make up for this shortfall in Medicare reimbursements, many health maintenance organizations and insurance companies are cutting payments to doctors and hospitals for treating patients.

But patients continue to demand the same or better care, while the actual cost of providing that care is going up. And that's putting the squeeze on companies throughout the healthcare industry.

"Virtually without exception, in every niche area of health care services that I can think of - the HMOs, nursing homes, hospitals, physician practice management companies - in this raging bull market, there's been one disaster after another," said Larry Smith, a healthcare industry analyst with Sutro & Co.

Sick Sector

Health care stocks have been conspicuously absent from the recent bull market.

                12-month price change
Symbol Company Price change
UNH United Health Group  30%
THC Tenet Health Care  44%
PHSYB PacifiCare Health Systems 17%
HUM Humana 57%
FHS Foundation Health Systems 59%
MDM MedPartners 51%
OXHP Oxford Health Plans 1%
MME Mid-Atlantic Medical Services 38%
SIE Sierra Health Services 59%
SHG Sun Healthcare Group 93%

SOURCE: Microsoft Investor

On the heels of bad news from MedPartners, other healthcare companies are reporting similar troubles. Tenet Healthcare, the nation's second largest hospital chain, says bad debt and Medicare cuts took a bite out of its latest earnings. Humana, which provides health coverage for 6 million people, warned that it too will miss its numbers due to cost pressures. And nursing home operator Sun Healthcare says its auditor is likely to question the company's viability as an ongoing concern.

"By and large, healthcare services is a wasteland with wrecked business models strewn across it," said Smith.

Some firms are failing because they expanded too quickly; others because of outright fraud or mismanagement.

New Strategies

Yet according to the American Association of Health Plans, most of the managed care industry is not in a tailspin, but a transition - as companies struggle to implement new cost-saving treatment strategies.

"We have the ability and the technology to in fact do disease management, which is the coin of the realm now in terms of cost-saving strategies," said Karen Ignani at the American Assn. of Health Plans. "So we have the capacity, we have the networks. We have to work on service - the physician-health plan relationship."

With medical costs continuing to rise and payments and reimbursements on a downward trend, healthcare firms will have to change the way they do business in order to survive. A growing number of physicians like Dr. Shelly Zinberg say that means more - and better - cooperation with doctors.

"Healthcare will always be a very personal issue, and should be," said Zinberg. "But the system of delivery of health care services is a product. Medical groups have to produce a product of programs that become tools for the physician in his office to use - that enable him to practice better medicine."

Not every healthcare stock is in critical condition, but many that are without an adequate financial cushion are experiencing a rough ride right now. And experts say it's not likely to end anytime soon.