Several of the country's HMO players are moving around today as the industry's Q4 earnings reporting season kicks into high gear. PacifiCare Health Systems (Nasdaq: PHSY) and UnitedHealth Group (NYSE: UNH) both reported their results this morning, adding to the in-boxes of healthcare investors who are still trying to digest the quarterly numbers from Aetna (NYSE: AET), Cigna (NYSE: CI), and Humana (NYSE: HUM) from earlier in the week. Next week, WellPoint Health Networks (NYSE: WLP) and Oxford Health Plans (Nasdaq: OXHP) are scheduled to step up to the plate and add to the analytical workload.

Before delving into the results, though, it may be helpful to set the scene first with a quick overview of what has been happening recently in HMO-land. With only a few exceptions, the major healthcare providers have bounced back extraordinarily well from their lows in October, when the threat of class action lawsuits alleging massive malpractice by the large operators caused an outright liability panic. Those fears have apparently been pushed under the rug, as evidenced by the rapid share price appreciations of the biggest gainers over the past three or four months:

Share price performance since October lows

WellPoint                        +40%
Oxford Health                    +40%
PacifiCare                       +41%
Foundation Health                +50%
UnitedHealth                     +51%
Mid Atlantic Medical             +65%

Tossing the liability worries to the wind, investors have instead focused on the earnings growth stories at the above companies, which have been stellar. HMOs have benefited recently from their general abilities to push through premium increases, keep medical costs in check, trim operating expenses, and repurchase shares. For 1999, PacifiCare's earnings per share rose a strong 42% and the company is guiding investors to expect 15% growth in 2000. Meanwhile, year-end earnings per share at UnitedHealth were up 21% (excluding one-time items), with greater than 18% growth modeled in for 2000. Similar results will likely be forthcoming from WellPoint and Oxford next week.

The recent stock price performances mask the fact that the shares of the major HMOs as a group are still generally flat to down from where they were a year ago, underlining the wild swings in valuation that are a chronic attribute of the industry. Such volatility is not exactly a terrible thing for investors who are willing to follow the HMO business and look for instances of short-term asset mispricing -- this seems to occur with a fair amount of regularity every few months or so. What makes committing longer-term capital to this business so difficult, though, is the seeming inability of anyone to make long-term convictions about the HMO business one-way or another.

From an industry attractiveness standpoint, it would seem like the HMO business would not be such a bad place for a defensive-minded investor to park some capital for the long-term. Despite the quality of care grievances that are regularly lobbed at the industry, American healthcare consumers have become pretty comfortably tied to HMOs over the past few decades. Going back to a 1970s world of co-insurance and deductibles from today's system of co-pays is hard thing for most consumers to imagine.

Meanwhile, the major players have been able to perfect their business models in a relative placid competitive environment. Certainly, the publicly traded HMOs compete with each other and the major national not-for-profit entities. But new entrants with different models are not exactly beating down the doors to get into the managed care business. That gives healthcare insurance some semblance of stability at least from a capacity point of view, a luxury that doesn't often crop up in other areas of the insurance market.

For investors looking to benefit from the demographic trends that should make big business healthcare an even bigger business in the decades to come, there are several other sectors that may potentially produce better returns than HMOs, chief among them pharmaceuticals, biotechnology, and medical device development. The shifting societal winds can cause short-term pricing volatility in these sectors as well, but it may be easier for investors to make a solid case for long-term investment in another area outside of HMOs.

Related Link:
Fool on the Hill, 09/30/99: Managed Care's Liability Scare

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