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Keeping A Lid On Health Costs

Inside Wall Street


Medstat Systems has been a fast-rising star among health-related stocks, soaring from 14 to 31 last year. The stock, now at 24, still trades at a rich price-earnings multiple of 35, based on analysts' 1993 earnings estimates. Even so, it is still destined to go higher, insist some pros.

Why? In these times of earnest cutbacks in health-care costs, Medstat is in the very heart of the business that helps "major corporations and insurance companies contain soaring health-care expenditures," explains Kidder Peabody analyst Elliott Schlang.

Medstat Systems owns a database called MarketScan that covers more than 7 million privately insured individuals representing 320 million claims. This software tracks claims according to geographic, demographic, and clinical patterns. Schlang says Medstat's ability to convert this data into usable information for big corporations, including major insurers, gives Medstat a big edge in the business. One of Medstat's software programs, System2, allows companies with more than 10,000 employees to determine whether their per-employee health costs are rising--and why. For insurers, the system shows whether they are getting thefull value from their health-benefitprograms.

Among the company's clients are Prudential Insurance and CIGNA. Medstat Chairman and CEO Ernest Ludy expects more contracts will be signed with insurers and corporations this year, as pressure to curb health-care costs builds up. So Schlang sees Medstat exceeding his earnings estimates of 68 a share for the year ending Sept. 30, 1993, and 85 in 1994, vs. 1992's 48 . He thinks the stock will hit the high 30s in 12 months. GENE G. MARCIAL

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