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HMO Stocks Drop After Medicare News : Market: FHP and Pacificare shares are down sharply after the announcement of smaller rate increases than expected.


HMO stocks took a tumble Wednesday after the federal government announced that Medicare will give smaller rate increases next year than the industry had expected.

Two Southern California health maintenance organizations--Pacificare Health Systems Inc. and FHP International Corp.--are among the biggest players in the $250-billion market. Their shares were down sharply.

The Class A stock of Pacificare, whose Medicare business accounts for about 52% of its premium revenue, lost $5.75 a share to close at $34 in NASDAQ trading.

The premiums Pacificare collects from members on Medicare--the government's health insurance plan for the elderly and disabled--will rise an average of only 2.5% next year, the company said.

The HMO, based in Cypress, has 1 million members in several states.

Pacificare, like other HMOs, may add $1 or so to the co-payments of a few dollars that Medicare members now pay for a visit to the doctor, analysts said. And it will be looking for ways to reduce costs.

"We will continue to explore other avenues to control costs and lessen the remainder of the impact," said Alan Hoops, Pacificare's president and CEO.

FHP International Corp., based in Fountain Valley, said about a third of its 850,000 members are in the Medicare program. It said its Medicare premiums will rise by less than 4% in Southern California, where about half its members are.

FHP's stock dropped $2.75 a share to close at $21.50 in heavy NASDAQ trading.

Just last week, HMO stocks had floated up when President Clinton decided not to impose price controls on the business. But Tuesday the federal Health Care Financing Administration said premiums for HMO members on Medicare will rise an average of 5.4% for next year. The industry had expected an increase of 6% to 7%.

"It caught everyone by surprise," said Thomas E. Hodapp, a stock analyst at the brokerage Robertson, Stephens & Co. in San Francisco. "The question is: How nimble are the HMOs in their ability to manage this change?"

Fairly adroit, said Hodapp and analysts such as Mark Matheson of the brokerage Crowell, Weedon & Co. in Los Angeles.

"I think people overreacted today," Matheson said. "Overall, I'm not worried about HMOs."

Other analysts weren't so optimistic.

The brokerage Oppenheimer & Co. in New York, for instance, on Wednesday removed Pacificare from the list of stocks it recommends that customers buy.

Among the biggest losers Wednesday were Oxford Health Plans Inc., which lost $6.75 a share to close at $63.75; United Healthcare Corp., down $3.75 to $56.50, and U.S. Healthcare Inc., off $2 to $44.

Times staff writers Tom Petruno and Tom Mulligan contributed to this report.

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