Goldman Sachs Research Publishes New Report: Managed Care Industry Up-Cycle to Last Through 2004-2006.

Business Editors, Health & Medical Writers

NEW YORK--(BW HealthWire)--June 6, 2002

Goldman Sachs Managed Care analyst Charles Boorady expects a peak rate of margin expansion for managed care companies in 2003 due to premium acceleration and medical cost deceleration.

In the report, Mr. Boorady notes, "The tipping point of the current up cycle is at least 2 years away," he said. "Despite high medical costs in a weak economy and despite hospitals exercising leverage, we think the industry remains firmly focused on the positive side of the underwriting cycle, which we expect will continue through 2004-2006."

Highlights of the report:

- MARGINS ARE EXPANDING; MANAGED CARE INDUSTRY IS REBUILDING

CAPITAL:

The industry is rebuilding capital lost in the last down cycle from 1994-1999. An elongated up-cycle is likely being driven by weak investment portfolio results, new statutory capital requirements for HMOs, and more 'rational actors' as non-profits and mutual health insurers prepare to convert to for-profit without raising new capital. Higher HMO statutory capital requirements also raise target margins to earn the required cost of added capital.

- MEDICAL COST GROWTH SHOULD DECELERATE IN 2003 AFTER EIGHT

YEARS' ACCELERATION:

After eight years of acceleration we expect the growth rate in medical spending to decelerate in 2003-2006 although to a still high rate. Hospitals, 85% non-profit, are approaching profitability when ignoring charges in Medicare cost reports, and pharmacy costs will likely decelerate faster in 2003 with more substitutes, more financial incentive to switch, and a push to OTC for antihistamines.

- OVERWEIGHT STOCKS FOR EPS GROWTH AND P/E EXPANSION; ROTATION

IS THE GREATEST RISK:

Industry average relative forward P/E multiples are in line with historical averages. We expect the multiple to expand as the Street gains confidence in long-term earnings growth prospects. The dispersion in P/E multiples is unusually high as the Street differentiates winners and losers.

- HIGH TURNOVER IN 2003:

Many customers are looking to switch health plans in 2003 in an attempt to control medical costs. UnitedHealth has the best recent national account track record in our coverage universe and is our favorite again in 2003. For-profit BCBS plans Anthem, WellPoint, and Trigon have the most flexibility to control cost and also make national inroads.

Charles Boorady is the No.1 ranked Managed Care analyst according to the Greenwich Associates surveys of 2001 and 2002 and was ranked among the top analysts in the 1999, 2000 and 2001 Institutional Investor All-America Research Team poll.

For a copy of the report, please contact Ed Canaday, 212-357-0005.

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