HMO Stocks Take Hard Falls Amid the Threat of Class Actions

Shares of major health-maintenance organizations and health insurers fell sharply Thursday after a report that prominent lawyers planned to file class-action lawsuits o compel HMOs to provide better health care or risk massive court judgments.

Among the attorneys taking aim at HMOs is David Boies of New York, the man now heading the federal government’s antitrust action against Microsoft Corp., and Richard Scruggs, a Pascagoula, Miss., attorney who has recently waged a class-action battle against tobacco companies, the Wall Street Journal reported.

Peter Costa, an analyst with ABN Amro Securities, said the long-term effects of such suits on the industry remained uncertain.

“Clearly it will take a while for all of it to work its way out. The plaintiffs’ attorneys are a well-funded group. They could keep this alive for a long time,� Costa said.

Costa said the HMOs getting hit the hardest Thursday “are those with the deepest pockets.�

On the New York Stock Exchange, Aetna Inc., the nation’s largest health insurer with 22 million customers, fell $10.44, or 17%, to close at $49.25, and United Healthcare Corp., the No. 2 health insurer, fell $11.81, or 20%, to close at $48.69. WellPoint Health Networks Inc., based in Thousand Oaks, ended down $6.19 to close at $57, also on the NYSE.

In Nasdaq trading, Oxford Health Plans Inc. closed off $3.78 to $12.50, and PacifiCare Health Systems Inc. slipped $2.81 to close at $43.25.

HMOs, which combine the functions of health insurance companies and health-care providers, have been accused of withholding vital services from patients to maximize profits.

Congress is preparing to debate new regulations for HMOs designed to make them more accountable to patients, including provisions that could make it easier to sue health-care providers.

Tom Bantle, legislative counsel for consumer group Public Citizen’s Congress Watch in Washington, said he believed HMOs may tread more carefully in the future because of fears of lawsuits.

“I think what will happen is there won’t be a lot of litigation, but companies making medical decisions will make them more carefully, and that’s what we really want,� Bantle said.

“There isn’t much incentive now for the health-care industry to do right on its own,� he said.

One way lawyers hope to get their class-action suits in court is to argue that insurers have not lived up to guidelines set by the federal Employee Retirement Income Security Act, or ERISA, Stephen Neuwirth, an attorney with Boies & Schiller in Armonk, N.Y., one of the firms planning to file suit, told Bloomberg News. ERISA requires companies to disclose benefit information, including details of their claims’ approval processes, Neuwirth said.

Consumers are expected to allege they’ve been denied information on benefits, leaving them unable to tell whether they’ve spent more on health care than they should have.

The suits will ask a judge to order insurance companies to disclose such information and will seek unspecified damages.

Some attorneys have specific companies in mind. Joseph Sellers, an attorney with Cohen, Milstein, Hausfeld & Toll in Washington, said his firm will file a suit alleging fraud by “one of the industry leaders.� Although Sellers wouldn’t name the company, he said the suit will probably be filed next week.

The prospect of class-action suits is making investors wary.

“It’s a definite risk,� said Brendan Healy, an analyst at USAA Investment Management, which owns shares in Aetna and Cigna Corp. “I’m still trying to think how it’s all going to play out.�

Warburg Dillon Read analyst Geoffrey Harris said the threatened litigation was a potential “death warrant on the industry� and predicted that the uncertainty it has created will prevent HMO shares from recovering any time soon.

He said looming legislation mandating more rights for patients was also casting a cloud over the industry.

“It’s all moving in the direction of taking away tools that managed care has traditionally used to try to moderate the cost trend,� Harris said.

Analyst Michael LeConey of Security Capital Trading said individual lawsuits against HMOs have had mixed results, and predicted it would also be difficult for lawyers to win class-action suits.

“It attempts to prey on public disenchantment with managed health care. It will be difficult to prove a pattern of abuse. I don’t believe it’s possible to show a pattern,� LeConey said.

Bloomberg News and Reuters were used in compiling this report.

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Ailing Stocks

Health maintenance organization shares plummeted Thursday on fears of class-action suits against the industry. Monthly closes and latest for the Morgan Stanley index of 12 major HMO stocks:

Thursday: 212.53

Source: Bloomberg News