Healthcare Update
by Tim Meyer (TMF Attila)

McLean, VA (June 30, 1997) -- One of the most valuable tools available for your use are our stock message boards. They allow you to ask questions and share information with other investors across the world (some companies' officers have even been known to contribute to our boards). If you haven't availed yourself of this asset, I urge you to begin. If you don't find a message board for a specific stock, post your question or comment on the Healthcare message board. If enough interest is generated in a company, we will open an individual board. Also, if you have questions for me on anything you see (or don't see) in these updates, let me hear from you on the Healthcare boards as well.

OUR POLITICAL HEALTH

BUDGET AND TAX DEALS PASS ... BUT WE'VE ONLY JUST BEGUN

Before leaving town for their 4th of July "district work period" (remember when it used to be called recess -- just like school), the House and Senate approved their respective versions of the tax and budget bills that are supposed to balance the budget by 2002 and provide the largest tax cut in 16 years. Upon returning from the district work period, they will have to work out differences between the two versions of the legislation and reach agreement with the White House on the final package.

One of the more interesting issues to keep an eye on will be the Senate Medicare proposal that raises the eligibility age to 67 in 2027 and to means test Medicare premiums. There is growing opposition to the proposal to raise the eligibility age from a number of fronts. One of the more vocal is the business community -- especially those who provide former employees with health care benefits until they are Medicare eligible. Extending the age of eligibility puts two more years of health care costs on these employers and saves Medicare having to pay the bill.

MISSION IMPROBABLE

Health and Human Services Secretary Donna Shalala announced a new $2 million, 12 site antifraud demonstration project. In making the announcement Secretary Shalala said, "We know that in order for our antifraud efforts to really pay off, we need to look beyond Washington [they must have that place all cleaned up], and there is no better way to do this than to help older volunteers [I love volunteer programs that cost $2 million] across the country to become the eyes and ears of our communities."

The two-year program will recruit and train retired professionals to work with Medicare and Medicaid beneficiaries to identify fraud, waste and abuse.

HOW MUCH IS WHAT?

With the preceding story still fresh in mind, the General Accounting Office (GAO) issued a report saying that Medicare overpays large medical suppliers and does not know specifically what products it is paying for when it reimburses them. As you all know, the Health Care Financing Administration (HCFA) administers the Medicare program (reporting to Secretary Shalala). "HCFA does not know specifically what products it is paying for when it pays Medicare claims for medical equipment and supplies, according to our work to date," the GAO said. (Maybe we could get some volunteers to lend HCFA a hand -- if we have any volunteer money left).

NEW HCFA HEAD

The president announced he intends to nominate Nancy-Ann Min DeParle, currently associate director of the Office of Management and Budget for health and personnel, to head HCFA. She was formerly commissioner of human services for Tennessee.

HEALTHCARE STOCKS IN THE NEWS

It was a terrible week for PACIFICARE HEALTH SYSTEMS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PHSYA PHSYB)") else Response.Write("(Nasdaq: PHSYA PHSYB)") end if %>. On Monday, they announced the company expected second quarter earnings "to be substantially below analysts' estimates" and promised a conference call later in the week to discuss details. This announcement resulted in a one-day loss of $17 1/4 (21.3%) for Class A voting shares and $18 3/4 (21.9%) for nonvoting Class B shares.

On Friday, the company released a statement (and the CEO held a conference call for analysts), which said that financial results for the quarter ending June 30, 1997, are expected to be in the range of $0.30-$0.45 per share, compared to analysts' estimates of $1.16 per share. This news sent Class A shares down $6.55 (9.9%) and Class B shares down $6.188 (9.0%).

The company said the primary reason for the expected earnings shortfall is substantially higher care costs in its commercial and Medicare lines of business in a number of its markets, mainly those recently acquired in the FHP International Corp. transaction, but also in PacifiCare's California and Oregon markets. A quarter of the shortfall was attributed to the Utah market performing below expectations due to a shift of membership from capitated to non-capitated portions of its health care provider network, resulting in higher health care costs, and they determined that product pricing has been lower than necessary to cover actual costs.

Another quarter of the loss was attributed to the FHP California market performing below expectations as a result of a decline in commercial prices in late 1996 that has resulted in higher health care costs as a percentage of premium revenue (the medical loss ratio).

The company also reported other reasons for the shortfall including higher than expected prescription drug costs and higher health care costs in its Medicare program in the PacifiCare California market. The CEO said, "We are obviously disappointed by the performance of a number of these newly acquired assets." He also said the company didn't have one big problem; it's more like a boat "that has sprung a lot of little leaks that need to be plugged as fast as we can."

PacifiCare's problems were generally not viewed as indicative of an industry wide trend. It will be interesting to watch if PacifiCare can turn this around. For the week, PacifiCare A shares were down $20 7/16 (25.2%), closing on Monday at $60 9/16, while B shares were down $21 5/8 (25.3%), closing at $63 7/8.

It was also a week to forget for LIPOSOME CO. INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: LIPO)") else Response.Write("(Nasdaq: LIPO)") end if %>. The company announced that its lead drug candidate for lung inflammation, Ventus, failed to show efficacy in a large-scale human test. The test on hundreds of patients revealed no difference in response rates between Ventus and a placebo. The stock fell $15 1/4

(61.5%) following the announcement. Randy Befumo (TMF Templr) did a Fool Plate Special report on this which is available in The Lunchtime News 6/25/97. The company chairman said, "We are very disappointed in the results of this study." For the week, Liposome was down $15 11/16 (63.7%), closing at $8 15/16.

OXFORD HEALTH PLANS <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: OXHP)") else Response.Write("(Nasdaq: OXHP)") end if %> has entered into a multi-year agreement with PCS Health Systems, a wholly owned subsidiary of ELI LILLY & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: LLY)") else Response.Write("(NYSE: LLY)") end if %>, to provide advanced prescription management services for its 1.8 million members. Under the agreement, PCS will administer Oxford's prescription benefit plan and provide services that include formulary management, drug utilization review and clinical consultation with physicians. For the week, Oxford Health was down $1 7/16 (2.0%), closing at $71 3/4, while Eli Lilly was up $3 5/16 (3.1%), closing at $109 5/16.

COLUMBIA/HCA HEALTHCARE CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: COL)") else Response.Write("(NYSE: COL)") end if %> announced that its planned merger with VALUE HEALTH INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: VH)") else Response.Write("(NYSE: VH)") end if %>, originally intended for the second quarter of 1997, is now expected to be completed as soon as the preliminary injunction granted by a Massachusetts court is lifted and regulatory issues with the State of California Department of Corporations are resolved.

The preliminary injunction takes the place of a temporary restraining order that had been issued June 18 at the request of FHC Options Inc. FHC Options claims that its partnership with a Value Health unit (which provides mental health services to Massachusetts Medicaid beneficiaries) would be harmed by the pending merger because Columbia would have a conflict of interest as a hospital provider to the partnership.

Value Health said the partnership submitted a revised plan this week to Massachusetts to eliminate the alleged conflict of interest and is now in talks with the Division of Medical Assistance about the plan. No further details were available on the regulatory matters concerning the California Department of Corporations. For the week, Columbia/HCA was up $5/16 (0.8%), closing at $39 5/16, while Value Health was up $1/8 (0.6%), closing at $20 1/4.

MEDPARTNERS, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MDM)") else Response.Write("(NYSE: MDM)") end if %> announced that Fischer Mangold, a hospital contract management company, has merged with MedPartners. The transaction will be accounted for as a pooling of interests. Fischer Mangold provides administrative management and physician staffing to 28 hospital clients in 11 states. The group also has two primary care clinics in California and operates its own medical billing company, Doctors Essential Services, Inc. Fischer Mangold currently provides care to more than 500,000 patients annually. For the week, MedPartners was up $1/8 (0.6%), closing at $21 5/8.

WALGREEN CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: WAG)") else Response.Write("(NYSE: WAG)") end if %> and PROXYMED, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: PILL)") else Response.Write("(Nasdaq: PILL)") end if %> announced that Walgreen has arranged for ProxyMed to acquire its electronic prescription network, Pre-Scribe. The Pre-Scribe network enables prescription filling via a direct electronic link between physicians' computers and local pharmacies. Pre-Scribe has been operated previously by Integrated Systems Solutions Corp., a division of IBM. ProxyMed is acquiring copyrights, trademarks, and software relating to Pre-Scibe. Currently, several thousand physicians across the country use Pre-Scribe.

Under a second agreement, ProxyMed will provide connectivity between Walgreen pharmacies and ProxyMed's physician network (ProxyNet(TM)) for 12 years, of which the first three are on an exclusive basis. Walgreen will pay a per transaction fee for each prescription processed through both Pre-Scribe and ProxyNet. For the week Walgreen was up $1 3/4 (3.4%), closing at $53 5/8, while ProxyMed was down $1/2 (4.8%), closing at $9 7/8.

Aetna U.S. Healthcare Inc., the health business unit of AETNA INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %>, and FPA MEDICAL MANAGEMENT, INC. <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: FPAM)") else Response.Write("(Nasdaq: FPAM)") end if %> announced that they have signed an agreement to enter into a national long-term provider relationship that will allow many of Aetna U.S. Healthcare's more than 14 million health members to access FPA's affiliated physicians effective July 1, 1997. For the week, Aetna was down $4 3/16 (3.9%), closing at $102 13/16, while FPA Medical was up $1 3/16 (5.3%), closing at $23 11/16.

The Federal Trade Commission (FTC) closed its investigation into the refusal of RITE AID CORP. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: RAD)") else Response.Write("(NYSE: RAD)") end if %> and other chain pharmacies to participate in the Maryland State Employee prescription drug plan with Merck Medco, a subsidiary of MERCK & CO. <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MRK)") else Response.Write("(NYSE: MRK)") end if %>. Rite Aid, and others, refused to participate in the program because they felt the reimbursement rate was too low. Merck Medco then filed an antitrust lawsuit alleging they illegally conspired to boycott. Rite Aid said it is seeking a fair price on its pharmacy services and if "we are not offered a fair price, then we will not participate." (What a revolutionary idea). For the week, Rite Aid was up $1 (2.0%), closing at $49 7/8, while Merck was up $4 7/8 (4.9%), closing at $103 1/2.

Health Care Update readers will be interested in The Daily Double write up of MIM Corporation <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: MIMS)") else Response.Write("(Nasdaq: MIMS)") end if %> on June 27. For the week, MIM was down $1 1/2 (9.4%) closing at $14 3/8.

EARNINGS REPORTS

Walgreen Co.reported third quarter net income of $108.1 million, or $0.44 a share (two cents higher than estimates), on revenues of $3.4 billion, compared to 1996 third quarter net income of $91.6 million, or $0.37 a share, on revenues of $3.0 billion. For the week, Walgreen was up $1 3/4 (3.4%), closing Monday at $53 5/8.

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 a reminder forwarded to your email address when the new update has been posted. In the meantime, here is hoping your investments are healthy! (Change in bold).

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