Healthcare Update
by Tim Meyer (TMF Attila)

McLean, VA (June 23, 1997) --

OUR POLITICAL HEALTH

SMOKE SIGNALS ... IT'S A DEAL! ... MAYBE?

Mississippi Attorney General Michael Moore said Tuesday, "The tobacco industry must be punished for past misconduct, must maintain their liability for the future...and nicotine has to be regulated by the FDA [Food and Drug Administration]. They will give us what we want, or we will go to court."

Florida Attorney General Bob Butterworth said, "They are going to really and truly hurt...They have to be punished for all their past activities. Period. Punished, punished, punished."

Rhode Island became the 38th state to file suit against the tobacco companies (their attorney general was probably slow to file because as we have previously discussed, he has been trying to figure out if the $41 million sales price offered by COLUMBIA/HCA <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> for the Roger Williams Medical Center in Providence was fair).

Two other states sued before the end of the week, bringing the total to 40 but I never saw who they were. The 10 states that have not sued are: Alabama, Delaware, Kentucky, Nebraska (although Nebraska previously announced it wanted a share of any settlement), North Carolina, North Dakota, Tennessee, Virginia, and Wyoming.

On Friday, a deal was announced. Tobacco companies would pay a total of $368.5 billion for 25 years, and then $15 billion a year in perpetuity.

To settle past misconduct, the deal designated $60 billion as punishment. Over half of that goes for health care for uninsured children. The rest will go to a health-care trust fund to be used as determined by a presidential commission.

The remaining $308.5 billion would be divided among reimbursements to states, providing free smoking cessation programs to all smokers, anti-smoking education and advertising and enforcement of the settlement, including financing state stings on retailers (it is not clear if the federal sting program being financed by the Health and Human Services Department (HHS), discussed in last week's update, will continue).

Attorneys' fees will be paid separately by the tobacco companies. The agreement will allow the FDA to regulate nicotine as a drug but it cannot ban it until 2009, and even then would have to prove that a ban would not cause a significant black market and to give Congress a chance to object. In addition, tobacco companies have agreed not to use cartoon characters or humans in ads, not to advertise on billboards, and post bigger warning labels on cigarette packs, as well as other restrictions.

In return, the tobacco companies will get relief from pending lawsuits. Individual smokers could not sue for punitive damages for any past misconduct by tobacco companies (juries have never awarded punitive damages in past tobacco cases) and any money won for medical bills, lost wages, etc. would be capped at $5 billion annually paid for out of part of the annual payments scheme. Any punitive damages that may be awarded in suits for future wrongdoing by tobacco companies would also be paid out of the fund. All class-action lawsuits against the industry would be banned and the 17 pending smoker' class-action lawsuits would end. Plaintiffs would receive no money, but would get free anti-smoking help (it appears attorneys will receive money, even if they need anti-smoking help).

Let's look at some numbers, remembering the attorneys' general comments about punishment. $368.5 billion over 25 years works out to $14.7 billion a year. Reports I've seen say that cigarette companies will be allowed to raise the price of cigarettes by $0.75 a pack (generating $15 billion in additional revenue) without having to worry about price-fixing suits. The additional cost is estimated to reduce consumption from "addicted" consumers by 16% or $1.4 billion. At first glance that would look like the tobacco companies will lose in the deal except what isn't clear is the amount of savings they will realize from reductions in current annual budgets for marketing and advertising of $5.5 billion and legal costs of $600 million. Looks to me like the real punishment here isn't to tobacco companies but to their "addicted" customers.

The uninsured children health care coverage numbers are also interesting. In separate news this week, the Senate Finance Committee voted to nearly double cigarette taxes with a 20-cent-per-pack tax that would raise nearly $15 billion over five years. Senate aides said that about $8 billion of that would go to children's health, in addition to $16 billion previously passed and that would allow the government to provide coverage for about two-thirds of the estimated 10 million children in the country now lacking health care. If that's accurate, $24 billion over five years covers two-thirds of the uninsured children, then the $35 billion payment from tobacco companies for children's health care ought to cover the remaining one-third and then some, shouldn't it? Does that mean Congress will now reduce other taxes because through this deal the tobacco companies are picking up a significant chunk of the children's health care tab (I'm not holding my breath)?

Finally, this whole thing has to be approved by the Congress and the President. In a statement, the president said, "Until now, we have not had the opportunity to review the actual agreement and we have not concluded whether it is in the best interest of public health. Over the next several weeks, we will undertake a thorough public health care review" (Don't forget the President's brother-in-law was one of the attorneys involved in the settlement).

Senate Majority Leader Trent Lott said the Senate schedule leaves the deal "locked out pretty much until September" (Don't forget Sen. Lott also had a brother-in-law involved in the settlement). Tobacco foes on Capital Hill were quick to comment on the agreement. Senator Edward M. Kennedy (D-MA) said, "Congress cannot and will not be bound by the negotiations of others. It would be preposterous for Congress to rubber-stamp this or any other tobacco settlement."

Senator Frank R. Lautenberg (D-NJ) said, "If the tobacco companies think Congress is going to rubber-stamp this agreement, I have one question for them: what are you smoking?" (I'm sure glad I don't own any rubber stamp stocks). I doubt we've heard the end of this.

HEALTHCARE STOCKS IN THE NEWS

AETNA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %>, parent of Aetna U. S. Healthcare, became the first company to file suit to block a new Texas law that would allow HMOs to be sued for medical malpractice for coverage denials or delays. Aetna maintains that this provision is preempted by the 1974 Employee Retirement Income Security Act (ERISA) regulations. A Virginia federal court has previously ruled however that ERISA does not pre-empt state claims alleging medical malpractice by physicians and vicarious liability by HMOs. Depending on the outcome of the Aetna case in Texas, this could be an area that will eventually be decided by the Supreme Court. For the week, Aetna was down $2 1/2 (2.3%), closing at $107.

Sierra Military Health Services, Inc., a subsidiary of SIERRA HEALTH SERVICES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SIE)") else Response.Write("(NYSE: SIE)") end if %> was notified that the selection of a prime contractor for Region 1 of the Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) will be delayed until approximately September 30, 1997. The Department of Defense (DOD) has delayed a decision on the award of the award of a five-year health services contract worth about $1.5 billion and has asked both bidders for the contract to submit a second "best and final offer," by July 21, 1997.

Reuter news reported that Sierra Health had identified the second bidder for the contract as FOUNDATION HEALTH SYSTEMS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: FHS)") else Response.Write("(NYSE: FHS)") end if %>. The contract encompasses 600,000 CHAMPUS beneficiaries in Washington, D.C. and 13 northeastern and Mid-Atlantic states. For those of you have been following the travails of the Health Care Financing Administration (HCFA) in attempting to trial run competitively bid Medicare risk contracts, I will once again point out that competitive bidding for government funded health care is not a new concept. If only there weren't that cone-of-silence around HCFA and DOD. For the week, Sierra Health was up $5/8 (2.0%), closing on Monday at $31 3/8, while Foundation was up $3/8 (1.2%), closing at $32 3/8.

ABBOTT LABORATORIES <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: ABT)") else Response.Write("(NYSE: ABT)") end if %> declared a quarterly common dividend of $0.27 per share, a 12.5% increase over the year-earlier quarter. Regular readers of this update know I usually don't cover dividend announcements but when it marks the 294th consecutive dividend paid since 1924, I figure it deserves mention. For the week, Abbott Labs was down $1 1/8 (1.7%), closing at $67 7/8.

LIVING CENTERS OF AMERICA, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LCA)") else Response.Write("(NYSE: LCA)") end if %> and GRANCARE, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: GC)") else Response.Write("(NYSE: GC)") end if %> announced their merger agreement has been amended (related story below). Rather than being exchanged for stock in the combined company, 10% of GranCare's outstanding common stock will be canceled in the merger in exchange for $10.00 per share in cash. The remaining 90% of GranCare's common stock will be exchanged in the merger at the previously announced ratio of 0.2469 of a share of Living Centers' common stock for each share of GranCare stock. The additional cash to finance the GranCare cash election option will be provided by Apollo Management, L.P., which will increase the amount of its investment in the Living centers from $200 million to approximately $228 million. Apollo will own approximately 45% of the outstanding Living centers common stock, and existing GranCare and Living Centers stockholders will own approximately 43% and 12%, respectively. For the week, Living Centers of America was down $3/8 (1.0%, closing at $38 1/2, while GranCare was down $1/8 (1.2%), closing at $10 1/4.

VITALINK PHARMACY SERVICES, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VTK)") else Response.Write("(NYSE: VTK)") end if %> and their majority shareholder, MANOR CARE, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MNR)") else Response.Write("(NYSE: MNR)") end if %> filed a lawsuit against GranCare, Inc. to enforce a non-competition agreement entered into just four months ago. The suit seeks preliminary and permanent orders blocking the proposed combination of GranCare with Living Centers of America, Inc. According to the complaint in the action, GranCare is specifically prohibited from becoming involved in any way, directly or indirectly in the institutional pharmacy business for three years. GranCare said it believes the suit is without merit. For the week, Vitalink was unchanged, closing at $18 1/2, while Manor Care was up $1/2 (1.6%), closing at $31 5/8.

OMNICARE, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: OCR)") else Response.Write("(NYSE: OCR)") end if %> announced it has acquired EBA Pharmacy, Inc. (doing business as Norwest Pharmacy), a privately owned institutional pharmacy provider based in Chicago. In addition Omnicare said it also has acquired Sun Health, Inc., a privately owned institutional pharmacy provider in Hartford, Connecticut. Together these acquisitions add approximately $4.0 million in annualized revenues to Omnicare and the additional 2,200 long-term care facility residents receiving pharmacy services from Omnicare means Omnicare now provides pharmacy and related consulting services to approximately 350,100 residents in over 4,200 long-term care facilities according to the company. For the week, Omnicare was down $5/8 (2.2%), closing at $28 1/4.

ACCESS HEALTH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ACCS)") else Response.Write("(Nasdaq: ACCS)") end if %> announced an agreement with Blue Cross and Blue Shield of Georgia (BCBSGA) to provide personal health and care management services. An initial enrollment of 280,000 members will have access to services starting July 15, 1997. BCBSGA provides services to 1.5 million Georgians overall and Access Health has a total membership of 20 million people nationwide. For the week, Access Health was up $2 3/8 (11.8%), closing at $22 1/2.

COMPLETE MANAGEMENT, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: CMI)") else Response.Write("(AMEX: CMI)") end if %> announced that it has completed the purchase of Consumer Health Network (CHN) of Piscataway, New Jersey, for $12 million, consisting of $8 million in cash and 314,650 shares of common stock. In addition, a contingent $1 million payment based on future earnings of CHN may be made. According to the company, CHN operates the largest PPO network in the state of New Jersey and has begun to establish its network in New York and Connecticut. The three-state PPO network consists of 7,818 physicians and 119 hospitals, serving about 975,000 lives. For the week, Complete Management was up $1 1/2 (12.0%), closing at $14.

PHYSICIANS RESOURCE GROUP, INC. (PRG) <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PRG)") else Response.Write("(NYSE: PRG)") end if %> announced that it had filed counterclaims against EQUIMED INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EQMD)") else Response.Write("(Nasdaq: EQMD)") end if %> in the action between PRG and EquiMed in which EquiMed asserted claims against PRG seeking damages in excess of $30 million and other claims seeking unspecified damages. PRG's counterclaims include, among others, breach of representations and warranties, fraud and conversion. PRG seeks various forms of relief, including, compensatory damages in excess of $45 million and punitive damages. In the same press release announcing the counter-suit, the company said that it expects a number of factors "may have an impact on PRG's ability to achieve analysts' current expectations in 1997." For the week, PRG was down $3/4 (7.7%), closing at $9, while EquiMed was down $1.19 (31.7%), closing at $2.56.

AMGEN INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AMGN)") else Response.Write("(Nasdaq: AMGN)") end if %> had less than good news this week. First, the company said that it anticipates a reduction in the growth rate of sales this year of its top selling product, EPOGEN, an anemia drug, because of a policy change by HCFA. Prior to the change which is scheduled to take effect August 1, HCFA intermediaries were authorized to pay for patients whose hematocrits were above the HCFA-approved level of 36% with adequate medical justification. Under the new rules, medical justification will no longer be accepted for payment of claims for hematocrits above 36%, and reimbursement will be denied if hematocrits exceed 36.5% on a 90-day rolling average basis. The company said that despite the sales rate slowdown, it remains comfortable with the current range of analysts' estimates for earnings per share of $2.80 to $2.85 for the year, and with analysts' range of $0.70 - $0.73 a share for the second quarter.

Amgen's only other approved drug, Neupogen, a cancer chemotherapy treatment, was the subject of two studies reported in this week's New England Journal of Medicine. The first study found that the hormone found in Neupogen "has little practical clinical benefit." The second study found the hormone "had some clinical benefit in children," but it did not "prolong survival, or reduce the cost of supportive care." Finally, the company announced that preliminary results of the first human test of its leptin obesity drug showed that it reduced weight loss and was "reasonably well-tolerated" by most subjects. For the week, Amgen was down $3 1/4 (5.2%), closing at $58 7/8.

Three companies of interest to Health Care Update readers were covered this week in The Daily Trouble , and are worth a read. They were Autoimmune, Inc. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: AIMM)") else Response.Write("(Nasdaq: AIMM)") end if %>, HEARx, Ltd. <% if gsSubBrand = "aolsnapshot" then Response.Write("(AMEX: EAR)") else Response.Write("(AMEX: EAR)") end if %>, and Epitope <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: EPTO)") else Response.Write("(Nasdaq: EPTO)") end if %> . For the week, Autoimmune was down $3/16 (8.8%), closing at $1 15/16, HEARx was down $1/16 (4.0%), closing at $1 1/2, and Epitope was up $1/4 (3.2%), closing at $8.

EARNINGS REPORTS

REXALL SUNDOWN, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RXSD)") else Response.Write("(Nasdaq: RXSD)") end if %> reported third quarter net income of $9.3 million, or $0.27 a share (a cent higher than estimates), on revenues of $69.6 million, compared to 1996 third quarter net income of $6.1 million, or $0.20 a share, on revenues of $54.6 million. For the week, Rexall Sundown was up $9/16 (1.6%,) closing Monday at $35 7/16.

HORIZON MENTAL HEALTH MANAGEMENT, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: HMHM)") else Response.Write("(Nasdaq: HMHM)") end if %> reported third quarter net income of $1.9 million, or $0.29 a share (two cents higher than estimates), on revenues of $20.5 million, compared to 1996 third quarter net income of $1.4 million, or $0.22 a share, on revenues of $15.8 million. For the week, Horizon Mental Health Management was up $4 3/4 (23.8%), closing Monday at $24 3/4.

That will wrap it up for this week. Please share any comments/suggestions on how to improve this feature via e-mail (TMF [email protected]). Also let me know if you would like the update forwarded to your email address. In the meantime, here is hoping your investments are healthy!

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