One Remedy For Controlling Health Care Costs

Like most health-maintenance organization stocks, shares of United American Healthcare have taken ill, both from worry about what Clinton's health-care plan might do to profits and employer resistance to higher premiums. From 21 1/2 on Feb. 8, the stock fell over 40% before rebounding to 13 7/8 on Mar. 3. (The stock split 5-for-4 on Mar. 4). Some savvy analysts say the pummeling was unwarranted, since UAH manages but does not own HMOs and gets paid from HMO revenues, not profits. Says analyst Stuart Linde of Fahnestock & Co.: "It's a low-risk business with great prospects."

The Detroit-based company manages two large HMOs, one in the Detroit area, the other in Cleveland. UAH, which went public in 1991, is trying to raise its profile and recently moved its stock to the Big Board.

UAH sees profits for itself and savings for taxpayers by getting medicaid recipients into HMOs. Both of UAH's HMOs include large numbers of medicaid patients as well as those from employer groups. UAH President Ronald Dobbins says medicaid costs in Michigan are 10% lower for those recipients who are in the HMO.

When medicaid recipients are required to enroll in managed-care programs, they still have a choice of several. UAH is now in a joint venture with a Washington HMO to compete for the city's 100,000 medicaid recipients. And UAH is a contender to run a similar program for New York City. Says Michael LeConey at RAS Securities: "Medicaid costs have to be controlled, and this company can do it."

GOOD STANDING. UAH is also a "third-party administrator" (TPA) of self-funded employer health plans, and it will soon announce the acquisition of another TPA company. Most TPAs, says Dobbins, process claims but don't offer utilization review and other managed-care services that UAH can add.

Analysts also speak highly of Dobbins. A member of the health-care task force on President Clinton's transition team, Dobbins is part of a group of executives that recently met with members of the First Lady's health-care reform group. Dobbins' standing in the industry, they say, can help UAH win new business. Financing expansion is no problem: UAH has $3.65 per share in cash and securities, but since interest rates are low, the company will borrow for its acquisition.

Analysts estimate UAH will earn as much as $1.10 per share (pre-split) for the June, 1993, fiscal year, and as much as $1.50 for fiscal 1994. They also think that once investors learn more about the company, they will bid up the 13 price-earnings ratio to 20. That could send the stock to the upper 20s.

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