The bigger they (MCOs) are, the better they’ll do

That’s the word on Wall Street, which sees managed care companies performing differently from last year.

For the most part, nearly all of the players in this industry benefited from some of the same trends — rising employment, which translates into additional enrollment, and growing premiums. And these factors should continue this year.

But several of the largest companies are expected to outperform their rivals, according to Doug Simpson, a securities analyst at Merrill Lynch who tracks managed care stocks. As he sees it, the biggest companies with specific operating advantages and firm financial footing will begin to pull ahead.

“This is an industry where you benefit from scale and a larger market position,” says Simpson, who expects the sector to price slightly ahead of medical cost trends of about 10 percent this year. “This means the larger companies can do a better job of pricing their products appropriately.”

From a financial point of view, he noted that the managed care sector generated earnings-per-share growth last year of 33 percent. This year, though, Simpson forecasts that the group will post an average increase of only 12 percent and, next year, 13 percent. Why the downward curve? Only a few big players are projected to do well.

The universe he tracks includes Aetna, Cigna, First Health, UnitedHealth, Anthem, WellPoint, WellChoice, Humana, PacifiCare, Oxford, Coventry, Health Net, and Sierra Health.

Of course, one trend that isn’t expected to change is consolidation, such as the deal between UnitedHealth and Oxford. So as the big companies get bigger, he believes, the smaller players will be at an increasing disadvantage.

That’s because the mergers allow the emerging entity to leverage technology costs, which places pressure on regional companies.


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