Industry Spotlight
Managed scare
It’s hard to find an industry more battered than financials this year, but one sub-sector in a normally defensive corner of the market fits the bill: “managed care.”
Margins are shrinking amid higher medical costs. This prompted UnitedHealthgroup Inc. (UNH) and Coventry Health Care (CVH) to pre-announce lower earnings for the year. There are also risks involving government reimbursements from Medicare.
Shellie Stoddard, credit analyst at Standard & Poor’s, says “the disappointing margins have a lot to do with the economy. … These companies haven’t gotten the members they were expecting” as employers have cut coverage. And last week, Congress passed a bill that will trim spending on Medicare Advantage programs, which are privately offered.
The bill limits payments for “fee-for-service” plans, which could hurt top-line growth for managed-care firms such as Humana (HUM) and Universal American (UAM), Stoddard says. President Bush vetoed the bill, but Congress overrode the veto Tuesday night.
Scott Fidel, an analyst with Deutsche Bank, notes “investor sentiment in managed care is the worst we can recall.” However, he has “buy” ratings on five firms based on an improved pricing outlook for 2009 and forecasts for medical costs to stabilize: UnitedHealth, Aetna Inc. (AET), Wellpoint Inc. (WLP), Health Net (HNT) and Cigna Corp. (CI).
