The managed-care industry can be forgiven for feeling as if each of its hands is tied, Spanish Inquisition style, to horses charging in opposite directions. Yet investors recently have been trashing the stocks of publicly traded HMO companies. Because Wall Street thinks managed-care firms haven't done enough to control costs. In a procession that has cost shareholders billions, HMO companies have, one after another, reported disappointing earnings over the past few months. Long viewed as immune to the industry's profit woes, Oxford earlier this month reported its first-ever quarterly loss.
Mergers are to blame for some of the shabby earnings performances.
HMOs have been buying each other with a vengeance, and traditional health insurers have been buying HMOs too. Bigger may be better eventually, but the short-term problems have been severe. PacifiCare admits that in the commotion accompanying its February acquisition of FHP International, it didn't do a good job of controlling medical costs. Aetna's effort to integrate U.S. Healthcare after it purchased the HMO pioneer last year meant letting go thousands of employees and closing dozens of data centers. The result was a big claims backlog.