'TAKE two and call me in the morning' has been known to cure many an ill. But stronger treatment is needed for United HealthCare, one of America's largest managed-care companies, which on August 10th called off its proposed $5.5 billion merger with Humana, a smaller rival. A few days earlier United HealthCare had reported a pre-tax loss of $679m for the second quarter, including a $900m charge for 'strategic realignment activities'. That refers to the high cost of dabbling in difficult markets, in particular America's state-funded Medicare system for the elderly.
While realignments may bring immediate relief in chiropractic, they do little for investors. United's shares have fallen by 34% since the losses were announced. And the company is not alone. Oxford Health Plans, which was once the darling of the managed-care world for its user-friendly health schemes, has been in the doghouse for almost a year. Its second-quarter pre-tax loss reached $508m.
Such poor showings have undermined the share-price performance of even modestly profitable companies, such as Humana. Matters are not much helped by public fears about the quality of American managed care, and government legislation in the works that threatens to regulate the industry. According to Morgan Stanley Dean Witter, an investment bank, the composite share value of America's 12 publicly traded managed-care companies has fallen by 34% in the past two months.
So what brought on this malaise? One cause is botched computer systems and underwriting, especially at Oxford, which has led to problems with billing and premiums. But a more recent failing, and one that will be harder to put right, is the industry's attempt to insure elderly Americans.
American managed care was hearty while it devoted itself to big employers fed up with spiralling insurance costs. With some oft-damned cost-containment measures, managed care brought these premiums under control. Recently, they have been rising by at most 3% a year. But with over 75% of America's privately insured employees already in managed-care plans, there are few corporate pickings left.
Instead, managed-care firms have been tempted by the 37m people covered by Medicare, the federally funded health-insurance scheme for Americans over 65 years old. Only 16% of these people are currently enrolled in private managed-care plans, and the federal government is keen to double this proportion by 2002.
But Peter Kongstvedt, a managed-care expert at Ernst and Young, a consultancy, warns that this is far from easy money. Marketing managed-care plans to the elderly is expensive, since they must be persuaded and enrolled one by one. American workers, by contrast, are roped in en masse through their employers.
Once in the plan, the elderly cost a lot more than their children do. They need lots of doctors' visits and expensive drugs. And Medicare recipients are hard to retain, since they have greater freedom than those on employer-funded schemes to move out of managed care.
Although they say they are keen, politicians hardly make taking on Medicare recipients easy. The government is trying to clamp down on overbilling by managed-care firms. The fiendishly complex way in which payments to managed-care firms are calculated means that those dealing with a mix of urban and rural populations end up short-changed. Moreover, legislation passed last year aims to reduce Medicare spending by $115 billion over the next five years. No wonder some firms-including United and Oxford-are planning to withdraw their Medicare coverage in certain bits of America.
But such prudence is probably not enough to improve the finances of the managed-care industry. According to Anne Anderson, a health-care analyst at Atlantis Investment in New Jersey, companies will have to raise premiums for employers by as much as 10% next year in order to maintain their capital reserves and investor confidence. Shareholders may feel a little better as a result; customers will not.
