HMO Stocks Fall on Class Actions Threat

Shares of major health-maintenance organizations and health insurers, including PacifiCare Health Systems Inc. in Santa Ana, fell sharply Thursday after a report that prominent lawyers planned to file class-action lawsuits to 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 lawsuits 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.”

PacifiCare shares slumped to a 52-week low of $42 before rebounding a bit to close at $43.25, down $2.81, or 6.2%, in Nasdaq trading. Less than five months ago, the stock moved above $100 a share.

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 Net works Inc., based in Thousand Oaks, ended down $6.19 to close at $57, also on the NYSE.

Another Nasdaq stock, Oxford Health Plans Inc. closed off $3.78 to $12.50.

HMOs, which combine the functions of health insurance companies and health-care providers, have been accused by many consumers and politicians 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 disclosure requirements of ERISA have not been satisfied,” Neuwirth said.

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 in Florida, Illinois or Texas.

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.”

Bloomberg News and Reuters were used in compiling this report.