Wall Street Week with Louis Rukeyser; 2329; Clinton's Health Care Proposal & the Stock Market

Wall Street Week With Louis Rukeyser is made possible by the Corporation for Public Broadcasting and by the annual financial support from viewers like you by the travelers over 30 million Americans benefit from our insurance investment services and managed health care. The travelers America's umbrella by M F S and FS helping you to a fund and institutional investors that achieve their financial goals since 1924 and by for eventual securities with more than fifty six hundred financial advisers nationwide Prudential Securities can help you invest your money wisely. Produce Friday Jan. 14 TONIGHT special guests are Kenneth S. Abramowitz health care analyst Sanford C. Bernstein and company Jerome R. brim buyer drug analyst. Lehman Brothers in Fort Wayne and Michael Frank Quitely managing director Solomon Brothers incorporated.

Good evening I'm Louis Rukeyser This is Wall Street Week. Welcome back. Well tonight folks we're going to be talking about two of the three subjects that most preoccupied the average human being your health and your wealth. The third subject will leave for another more intimate occasion. Our focus in this special half hour will be on health care. The area that Bill Clinton hopes to make the memorable centerpiece of his presidency and who is best new government program once expected to sweep through a docile Congress is now in ever more visible trouble on both sides of the aisle. After all that was that notorious right wing fanatic Pat Moynihan who startled the White House this week by announcing as the formidable Democrat who serves as chairman of the Senate Finance Committee that when you actually look beyond the rhetoric and examine the facts you find in one of Hans trenchant words that we don't have a health care crisis in America. This kind of heresy as compared to the

media cheerleading that reverberated throughout 1993 doesn't mean of course that there will be no changes in America's health care system even if the country stops short of the governmental nuke all those private at Sobeys approach to health care. A few significant rifle shots are likely to be coming at minimum. Perhaps dealing with such specific and clear cut problems as the fear of losing your coverage if you lose your job and the concern at all income levels about the potentially devastating financial impact of long term illness. So even as the winds in Washington are beginning to blow both ways the winds of change have not vanished. And the question on the table tonight is how was all this really going to wind up affecting the key industries that have helped bring the U.S. world leadership in medicine. The fellows who genuinely do the things that politicians still can't. Like discovering the drugs the cure the diseases insuring your family and mine against unexpected health problems. Caring for

patients when they fall ill in the company of top experts on all those industries. We'll see how they are likely to change if Washington decides what medicine to provide next. The health of the economy it was plainly on the mend this week with impressive gains in retail sales industrial production and consumer confidence accompanied by some similarly impressive evidence that inflation in both the consumer and producer areas is at the lowest levels in years. All that continued mightily to cheer the stock market with the Dow Jones industrials have been breaking records this year even faster than politicians have been breaking promises. And the bond market continued the near-impossible task of acting less mature than the stock market by changing course with every new Washington press release. Up with the better inflation news down with the better economic news. Meanwhile out there in the economy not everybody was shouting Harrar employer is facing the a ray of new and prospective

government impose costs remain notably slow to add full time employees while layoffs at a number of large corporations in recent days continue to represent the deepest cuts seen in America since John Buffett. And in the major undercover operation of the week one a CO reportedly is acquiring Calvin Klein's underwear business for some 70 million dollars apparently in 1994. The only thing that comes between me and my cabin's is a takeover offer you've heard of bootstrap operations this of course was a jockstrap operation and to return things to what passes for propriety in America today. Let's see what all the elegant toughs in Wall Street were up to in the week just passed. The Dow Jones Industrial Average has already gained more than 113 points in this year's first two weeks of trading moving today to its fifth new record of the year. Thirty eight sixty seven point two

zero and advance for the week of more than forty six points. And the prospect of low inflation with better earnings helped the broader indexes too with the New York and Nasdaq composite joining the Dow in record territory tonight. Our ten chief elves net out to absolute neutral on the next six months. A reading that I'm sure will provide wonderful guidance for you in planning your own financial affairs. Oh heck no need to thank me. Gold and Silver crept up a bit this week. The dollar was stable and the bond market ended on a downer though still slightly ahead for the week and in the heaviest news of the week it was revealed that the average Japanese now consumes nearly four times as much alcohol as the average American. Clearly our triumphant morning after is just around the next ice pack. Now before we meet tonight's special guests who are experts on the key industries likely to be affected by changes in the national health care system. Let's see how the stocks in those industries have

performed over the past two years as they begin to get a better look at Dr. Clinton's prescription for comparison here's how stocks in general as tracked here by the Standard Poor's 500 stock index did in 1992 and 1993. A slow but steady progress that left them twelve point eight percent ahead of where they started. The drug stocks which have been flying high earlier in the 90s were conspicuous victims of the past two years. The SNP drug stock index which includes Eli Lilly Merck Pfizer Schering-Plough syntax and Upjohn sold off amid a widespread disillusionment with big growth companies in 1992 and then took a second hit in 93 because of concerns about the impact of the Clinton program. By year's end the group was coming back a bit but its two year loss was a whopping twenty nine point nine percent. Three of the five stocks in the S&P multi-line insurance group are deeply involved with health and health

insurance at CIGNA and travelers. And that index which had boomed along with other financial stocks until the early fall ended the year with increasing concerns about the Clinton package. That's still up a solid twenty three point seven percent since the start of 92 to confirm the direct effect of the president's proposals. We also tracked Jefferson pilot the only stock in the S&P life insurance group with heavy involvement in health insurance. And as you can see it was also selling off in late 1903. Those still achieving a similar net two year gain of twenty four point four percent. But some stocks benefited from speculation about the Clinton proposal. The SNP hospital management group Columbia health care community psychiatric and national medical enterprises which bit off more than 42 percent from the end of 1991 to last April rebounded dramatically as investors began to conclude that many such companies would actually eventually be seen as part of the solution rather than part of the problem. A

surge last month enabled the group to finish the two year period barely behind the SNP with a gain of twelve point six percent and they've done even better so far in 1994 Willy's sharply varying patterns continue or reverse who will get the best and the worst medicine. As a nation moves to resolve its health care debate. With me tonight a top ranking experts on all three industries. Jerome Bromar covers the drug industry for Lehman Brothers does with such distinction that the current institutional investor poll rates him the best in the business. Michael Frayn Kelley has been a crack insurance analyst for Salomon Brothers since 1971 and has been with honors in that same poll every year since 1979. And Kenneth Abramowitz is at the top of the class among analysts of the hospital industry which he has been covering for Sanford C. Bernstein and company since 1978. Gentlemen let me begin by asking each of you. How does the

prospect of changes in the nation's health care system affect the outlook for the industry you cover. I follow the pharmaceutical industry and the way I see it is that the U.S. government will be likely to encourage a more moderate type of health care reform where they encourage more individuals and corporations to get into a managed care organization such as an HMO and as HMO has become more predominant the gatekeeper if you will of our health care system here in the U.S. largely because of government reform and current market share or current market trends. These HMO has become larger purchasers of drugs and forced greater price discounts on pharmaceutical companies because they do that the the operating profit margins of pharmaceutical companies will be squeezed and earnings will be disappointing. For many of the companies looking forward so the saw for the last two years is not in your judgment about the reverse.

No it's not. I think the sell off over the past two years were was largely due to market trends market conditions in which HMO has got their dominance in buying more and more drugs and as they gain greater purchasing power of the pharmaceuticals they got to the point where they could demand greater and greater price discounts from pharmaceutical companies. Now looking forward the government will encourage or exacerbate that trend. We'll get back to this later on but let's give Mike a chance. Insurance. It's a mixed bag depending on the sector of the of the business. The major group health insurers could benefit from a Clinton program with some obvious caveats the caveats being that no premium caps price controls and a reasonable bureaucracy to deal with for the workers compensation segment of the business. It could be a negative factor because the workers comp specialists will be losing some control over half of the business which would become primary in the health insurance end of the

business could actually be a small positive for auto insurance and medical malpractise insurance. So it depends on the sector we're looking at. Are you suggesting Mike that. The price controls or to use the euphemism the premium caps are not going to be imposed. Most people in the business believe they will not be imposed if they are imposed. It would change I think the way most insurers look at it would be considered a profound negative. If they were opposed then what's your view. Well it's not so easy to know what's going to come out of Washington and health care reform. The Clinton plan has a number of very damning elements to it and have generated important change in the marketplace. Unfortunately the plan is unusually flawed and has many fatal flaws to it. The most important of which is its 100 billion dollars under financed. When the debate really takes place and the different plans come to compete we'll get some amalgam of them with Cooper's plan being the most interesting and will get some amalgam. Looking at

the amalgam I see a positive for most neutral for hospitals and neutral to slightly negative for profit companies. For most the big positive is that if employers are obligated to pay 80 percent of an average plan it's very very positive for each most. An HMO you see charges perhaps $4000 a year a PPO 5000 insurance plan 6000. The average might be five thousand if it if employees have to pay 80 percent of 5000 or $4000. Millions of people will move into him most because it will be free to join an HMO but they might have to pay one or two thousand dollars out of their own pocket to stay in their traditional plan. When that happens I think you'll see millions of people move into a most so net net what will probably come out of the consensus after the Clinton plan is essentially radically modified in the sensually 90 percent eliminated in the remaining 10 percent that makes sense is incorporated and institutionalized it should help the most help the

hostiles a little bit by reducing bad debts. But unfortunately force hospitals to cut prices to serve him most in It'll hurt the medical suppliers somewhat as they have to serve a more price sensitive hostile environment. Don't let me cast myself in the. Rare roll of white house advocate if the White House was here and they said would you just said they'd say Yes but these plans you're talking about don't have universal coverage is it your view that we are not going to have universal coverage. I think we will have universal coverage and I think we should have it. And I think that will be the major contribution of the Clinton plan. Unfortunately none of the plans on the table right now address the issue properly. The Republicans deny that we should have an employer mandate in the Democrats one too strong of employment employer mandate subsidized by a government that has no money. I think an interesting compromise would be a $500 defined contribution employer mandate so that every employer must contribute $500 and we should raise that over time in

place of minimum wage increases so that over time we will have a minimum wage plus a health care contribution. And I think if we went for middle ground like that we could get universal health insurance without bankrupting the country or the small employer. Gerri let's go back to you because you were the most downbeat about your industry. Most people probably still don't realize this but the drug price increases have been de celebrating for some time of it not long before there was a Clinton plan. That's correct. Why is that drug prices in the 1980s averaged about 9 and a half percent compound annual. Then in 1900 too they began to slow down. The reason they began to slow down is that these large purchasers namely the HMO as were demanding discounts from drug companies. Then in 1903 as more HMO got into an act the act and other large purchasers got into the act of buying large volume pharmaceuticals from the major pharmaceutical companies. They realize that they can buy the cheaper drug within a given therapeutic category and still remain

still patients could receive the same level of advocacy as a result of those switches to the lower priced drugs. Drug prices have come down. What's your prediction for drug prices this year. I think drug prices in 1904 will probably be about 1 percent. That's down from 1993 of about 3 percent and by 1995 believe it or not will probably have flat to down pricing in the US market. So even this year you see drug prices rising less than the very low rate of inflation that we're having now given these circumstances. Are you a buyer of any of the drug stocks. We do like those drug companies that can get drugs sold to HMO and other large purchasers at reasonable prices set another way. Those drug companies that can get the most drug listed on formularies or list of drugs that doctors can prescribe within these organizations at favorable prices are still make good investments companies like Pfizer and Schering-Plough which have a more unique cost effective product line.

Michael do you feel about the stocks in your group. Neutral I guess is the best way to put it. Lou I think you want to be an elf BNL 50/50. I think that the stocks are now assuming the best that the industry can see. I eat pretty much a much more volume being pushed into this system. This is already a low low margin business so if margins simply stay where they are you want to 3 percent and we get more volume pushed through that system. We're going to make more money in the in the health insurance business. The big risk however is as I indicated earlier premium caps. And a massive new bureaucracy. Some of you want some additional bureaucracy is inevitable. Hopefully you'll be a reasonable bureaucracy if not we've got we've gone through a whole period of downsizing the insurance industry. We may be bringing those people right back in to deal with that bureaucracy announced today. It was going to do some downsizing. Does that help the company.

Well they actually didn't announce at the The Wall Street Journal or The Wall Street Journal announced that. And they said they would have you know not as good as the Vatican not quite I don't think that this would be if they did downsize this would be the third move that Aetna has made downsizing as has Cigna as has as has travelers. It should help it. It would make a big difference however in terms of the you know the performance the stock or the company any of these stocks you would buy. No we're not recommending any now except in the mid medical malpractise area where they could be a benefit. Same pool companies among the major group health insurers proto growing industry malpractise. Well it's a growing industry in terms of the balance sheet and if Clint would have his way and we get someone to call alternate dispute resolution mechanisms that could make the balance sheet look even even heavier than it is now. And that's good in the business. As for the major health insurers probably the best position because they've been at the longest. Cigna I'd rank as second. They already

focus on the jumbo the so-called jumbo account and travel is probably what those development this year might push you off your neutrality. Clinton gives up on premium gas. Do you agree with kind of that's likely to happen. I am less confident. I've I've I've I know what the industry says but what would you expect the industry. I haven't heard anybody in includes camp at least so far even on premium games. Is auto insurance going to be affected by this. Yeah about 20 percent of the auto insurance costs are medical in nature relatively tough to control. So to the extent that this gives us somewhat better control over those that 20 percent actually could benefit not have not a major issue in auto insurance. But I think more likely to be a help rather than rather a negative. The bigger insurers such as Allstate and State Farm have already been experimenting with so-called managed care networks. And they they seem to like it so for him what's your view on the structure of the groups you go.

I think that the plan that we were discussing the Clinton plan which has premium caps in it which has price controls on doctors which has press controls and drugs doesn't have a chance in the world of passing. The reason is that the last country that tried a plan like this was called the Soviet Union. And 75 years later the lifespan of the population is in the 60s while we're at 75. We do not want guaranteed access to a mediocre health care system. So therefore I assume that that's all politics and all get thrown aside when the debate really takes hold. Therefore I look at you know that and I know that but does Bill Clinton know that. Oh I think I don't think he understands that. But I think he will because I have a very high regard for the democracy in this country. And. We all like Santa Claus but when it comes down to it the American population is not going to pay 100 billion dollars more in taxes for this plant and it's not going to

tolerate mediocrity which comes about when you have essentially the equivalent of rent control which is what the Clinton plan is all about. That being the case I look at economics in the way I look at it is we have a revolution going on and they're shooting real bullets in the streets and the private sector is going to massively reform the health care system before the politicians can get to it. That being the case most are going to replace the insurance carriers the insurance carriers experience 10 percent cost growth every year. The HMO experience 5 percent 5 percent is not a lot. You do it every single year for the next 30 years and I promise you the most will take 70 percent of the population in this country without the politicians doing anything. And that to me is the most powerful trend going on in health care today. They've been terrific market performers lately other than the you'd buy at current prices. Well the HMO is not bargains at the current prices but I think that the economic forces are still there. I think they're in the third inning of revolutionizing the health care system

and I have four segments of HMO stocks U.S. health care in Oxford for New York City which is a very under penetrated market 15 percent penetrated. Companies like. FHP Sierra and Ramsey who are staff models. In other words they actually deliver the care in addition to providing the insurance service companies like Pacific here in Humana which are a large contract network models. Pacific here in the West Humana in the east. They have a very very big opportunity to become far far far larger companies. Are you telling me that the future of America is that we're not to be able to do is own physicians. Well we're going to be able to choose our physicians and within the context of a network. So in other words we won't be able to see perhaps 3000 doctors but we can see 500 doctors companies that are pioneering programs with which have some extra freedom or companies like United Health Care which I have forgotten to

mention which is a leader in point of service insurance in other words you have to go to the network. But if you don't want to you can go out of the network and pay extra. So we will be able to see doctors of our choice. We just may have to pay extra if they're not in the network. Jerry we only have about a minute left. I don't want to leave this subject without you telling us. Forget the politicians forget the economic future what new drugs are coming downstream that are important. Probably the single most exciting drug that will hit the market within the next year possibly two. It's Pfizer's 10 ADAP a new rheumatoid arthritis drug which is unique in that it is a safer drug than current therapy out there. I think that drug considering the fact that we have two million people in the U.S. alone with rheumatoid arthritis without good therapy could be at least a 500 million dollar drug if not a billion dollar drug within five years. And Mike do you agree with him that you will be put out of business by the motion you have stock up on them. Well I don't think so I think what he was going to do in our becoming HMO was themselves so we're going to compete I think

very effectively with with the HMO was keep in mind by we you mean those fellows are objectively analyzing the insurance industry right. The point about the insurance companies again it's a low margin business. Thanks very much I want to thank my distinguished guests Jerry Brown Mike from Kweli Encana bomblets for joining me tonight and I hope you'll be back again next week when my guest will be one of the most spectacular performers in the world of mutual funds. Michael De Carlo manager of the high flying John Hancock special equities fund. And he'll be telling us how he did it and what he's buying now. Now isn't that special. Meanwhile it's been Wall Street Week. I'm with a guy thing tonight far Wall Street Week With Louis Rukeyser is a production of Maryland Public Television made possible by the Corporation for Public Broadcasting and by the annual financial support from viewers like you by the travelers providing American business with insurance investment services and managed health care. The travelers America's umbrella. If I

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