If the recent past is prologue, then 2008 should be a relatively good year for managed care companies. On average, earnings per share should grow by 15 percent, according to Scott Fidel, health care analyst at Deutsche Bank Securities, who also forecasts total premium revenue to increase by 27 percent and membership to rise by 2.1 percent.

“Overall, most companies project that premium yields will remain generally stable, so that we expect premium yields should average in the 7 percent to 8 percent range for the industry in 2007 and 2008. Given that we expect medical cost trends to remain stable as well, we continue to believe premium increases should adequately cover cost trends,” Fidel writes in an investor note. Those cost trends include 5 percent to 6 percent growth in physician costs and some additional pharmacy costs, given that the favorable impact of a generic Zocor is unlikely to be repeated in 2008.

A recent report from Hewitt Associates noted that employer health care costs are projected to rise 8.7 percent in 2008. Costs per employee should grow by $694, “suggesting that managed care price increases should remain in the high single digits.”

But challenges are also in the offing. “We see several risks for managed care stocks,” he adds. “The primary near-term risk remains a Medicare compromise in Washington that includes a [payment] cut in Medicare Advantage. Medical cost trends will also continue to require alert monitoring. Another risk relates to a failure to implement initiatives due to management turnover at several of the major managed-care organizations.”

United Healthcare — While 2008 will be a below-average year in terms of enrollment and revenue growth, Fidel looks for 14 percent growth in earnings.

Aetna — Aetna is targeting several primary market segments: government and labor accounts, group Medicare private fee for service, individual, student health, part-time and hourly workers, and international group benefits. Health care revenues and operating earnings could grow in the double digits.

Cigna — The insurer is focusing on national accounts, international accounts, and cost savings, along with cross-selling higher margin specialty products such as disease management to its national accounts to drive growth.

Source: Deutche Bank Securities

Projected net margins for selected MCOs

Deutche Bank Securities expects commercial health plan net margins to be an average of 4.8 percent in 2008, a slight drop from the 5 percent that the bank estimates will be the 2007 figure. Medicaid plan margins will average 4.3 percent.

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