26 April 1991
2,200 words

Is greed good?
Financing medicine

Biologists are unlocking the secrets of the cell, with drugs that will cost thousands of dollars--while children are dying in the Bronx, for lack of 19th-century vaccines that cost pennies.

The Editorial Freelancers Association medical group--some of whose writers can't afford health insurance themselves--heard about the financial opportunities and problems of the health care system, in a panel, "Health Care and Finance," at the Women's City Club on 22 April 1991.

They heard the enthusiastic Jack Mescounis, Shearson Lehman Brothers investment specialist; the entrepreneurial Gordon Segal, M.D., board-certified anesthesiologist and investment counselor; and the outraged Julie Sochalski, R.N., Ph.D., Financial Analysis Manager, United Hospital Fund.

Health care consumes 13% of the gross national product and is growing faster than inflation, so it's a major sector of the economy and source of business. Editorial people have two good opportunities: first, to make lots of money working for the system, writing publicity material about new drugs and insurance proposals; and second, to make hay exposing the system.

The Bronx is turning into a third world country, said Sochalski. There are measles outbreaks in New York City, and the hospital budget was balanced with "smoke and mirrors." The New York State budget mandates community rating for the private insurance companies, which may drive everyone out except for Blue Cross/Blue Shield, and she doesn't know if that's a good thing, she said.

Gene to protein to Wall Street

First, Mescounis told how investors can make money investing in biotechnology, and how writers can get information for stories about the medical industry.

"There is an enormous amount of money to be made in doing the right thing and helping people," said Mescounis. For example, Amgen has FDA approval for Epogen, its brand of erythropoetin (EPO), which the body uses to turn on the production of red blood cells. Patients with anemia or blood loss can take EPO instead of blood transfusions. Amgen's stock went from about $4 to $100 a share.

Shearson, a division of American Express, manages initial public offerings (IPO) when biotechnology companies first sell stock to the public. For example, Xoma was developing monoclonal antibodies, which bind to the toxin that causes gram-negative sepsis, a major cause of death in surgical patients. The FDA rejected Xoma's marketing application recently because the controlled studies didn't show an increased survival, and Xoma's stock declined.

Shearson also managed the $75 million IPO of Sphinx Pharmaceuticals Corp. Sphinx was founded by two Duke University medical researchers, with $12.6 million from Eli Lilly and Co., to develop second messenger technology. Cells in the body are controlled by first messengers, for example, hormones like testosterone, which bind to receptors in the cell membrane, often compared to a key in a lock. The receptor in the cell membrane then releases a second messenger of its own, and this touches off a chain of additional messengers, which eventually cause the cell to react in response to the hormone--divide, move, secrete a protein, attack a microbe, or whatever. Sphinx is purifying and studying some of those second messengers in the cell wall to find therapeutic applications. Sphinx has one compound which will interrupt that chain in laboratory models that are similar to psoriasis. Since 2.5 million people in the U.S. have psoriasis, the compound would be profitable if it is effective and safe in humans. The stock sold initially in January at $15 a share, and is now down to $8 3/4, a financial "disaster," said Mescounis.

Getting the facts on health care companies

Mescounis handed out a copy of the Sphinx prospectus, a 57-page financial, business and scientific description of the company. These prospectuses are available to the public for every public stock offering, and are the primary source of information for reporters who write about IPOs.

Publicly traded corporations, such as Merck, Bristol-Myers Squibb, Johnson & Johnson, American Home Products, Lilly, Abbott Labortories, and Pfizer, regularly publish a 10-K form, along with an annual report and proxy statement, that contains similar detailed information about the company and is available free. The phone numbers for these companies can be found in the April 20 Fortune magazine, or in other directories easily available in libraries. [Note: 10-K forms are now available on the Internet at the SEC's Edgar database.]

Mescounis also handed out a report on Sphinx, and on the biotechnology industry overall, written by Shearson's biotechnology analyst, Teena Lerner. All of the major brokerage houses have analysts following the health care industries, and the magazine Institutional Investor lists its favorite analysts in the October issue. Nelson's Directory of Wall Street Research, an expensive publication which is available in the New York Public Library Economics Division, indexes analysts by the companies they follow.

The best place to start, though, is The U.S. Industrial Outlook, published by the U.S. Department of Commerce, which has an 18-page overview of the health care industry, including sources for further information and the phone numbers of the economists who prepared the overview. [Note: As part of the Reagan Administration's smaller-government policies, the Department of Commerce discontinued publication of the U.S. Industrial Outlook.]

Opportunities in cost control

Dr. Segal was a cardiovascular anesthesiologis at Cedars-Sinai Hospital, Los Angeles, for 5 years. He left to become "entrepreneurial," because he saw lots of opportunities.

"I try to create the companies and bring them to brokers like Jack to raise money," said Segal. Most of his enterprises involved some controversy. For example, he went into home health care, which enabled patients to go home from the hospital earlier. "Hospitals didn't like it because they lost money."

"You look for problems because wherever there's problems there's opportunities" to make money by finding solutions, said Segal. "Health care has a lot of problems."

One opportunity was the managed care industry, to review doctor and hospital bills for the insurance companies and reject the ones that are medically inappropriate or too high. Another opportunity was health maintenance organizations and preferred provider organizations. IBM, say, would offer to send their employees to a group in return for a 30% discount and 30-day payment.

Firing weekend potheads

Corporations are testing their employees for drug abuse, said Segal, because 80% of their health care costs are spent on 20% of their employees. Presumably, users of illegal drugs have higher health care and absence costs, and if the companies could get rid of those employees, they could save money. [A National Institutes of Medicine study on drug testing reported equivocal results.] The drug testing industry, driven by federal regulations for a drug-free workplace, is projected to be a $1 billion industry in 1994, said Segal.

Another group of investment opportunites surround AIDS, said Segal. For example, there is artificial blood. Devices to protect health care workers from needlesticks are getting popular. When hepatitis was the only problem, "Who cared if a nurse got stuck?" he said. But when AIDS appeared, hospitals started getting sued.

Segal is also interested in vitamins, such as Vitamin E, which in high doses act as anti-oxidants, "which have been proven to help retard cancer, and heart disease."

"Corporations are looking at this and saying that maybe if we put a penny down here it'll save us money in the future," said Segal. "So there's a cottage industry springing up of preventive medicine."

Smoke-and-mirrors financing

Sochalski started as a registered nurse 15 years ago, and moved into reimbursement policy, in the Medicaid program in Washington, D.C. "I used to get into a lot of arguments with insurance companies," she said, "and it was very difficult to combat the argument about why things cost so much." So she got a doctorate in finance. (She still has trouble figuring out her Blue Cross bill, though.)

Dr. Sochalski publishes the UHF's Hospital Watch, a quarterly survey of the hospitals in New York City. Rather than tabulating the standard financial ratios, they try to figure out what the numbers mean for health care. They have a library, are available for interviews, and are a good source for reporters writing about health care issues.

Sochalski pointed out several trends which have already crossed the crisis point and are being ignored by the news media.

Sochalski explained how New York City's health care budget for the current fiscal year was balanced with "smoke and mirrors." This included an "ingenious plan to delay payment one week to the hospitals, because it helps to balance the budget," she said. "If I'm a manager of a hospital, I got to make payroll next week, I'm not entirely pleased about that."

Medicaid is going up "incredibly," said Sochalski, and the bulk of the problem is not women and children, but long-term care in nursing homes. Policy makers are ignoring the problem, she said, in the hope it will go away.

It is a "disgrace" and "outrage" that "we have a measles epidemic in this City and across the country," said Sochalski.

"That should bring all of us to our knees," said Sochalski, "to think that in a country of such wealth, where they estimate in '92 we will spend $800 billion on health care, we can actually have an outbreak of an immunization-preventable disease."

HMOs and managed care have been around for years, said Sochalski, and she didn't think they were succeeding. Some analysts say that Americans want to be able to choose their own physician, she noted. Other analysts suggest that the physicians who wind up in HMOs are the ones who aren't good enough for private practice, so HMOs are providing a poorer class of care.

Community rating

The current reform approach in the New York State budget is to community rating for private insurers, said Sochalski. Blue Cross and Blue Shield already have community rating. This means the Blues are required to insure everyone in the state, at rates that are determined by the broad categories they fall into. The private insurers, such as Aetna and Prudential, can charge rates based on the medical experience of the individuals and companies that apply. This gives the private insurers an opportunity to "cherry-pick," or take the healthiest, most profitable people, and leave the sickest, least profitable people to the Blues. The Blues have 50% of the insurance market in New York State, and they can't make a profit, she said.

Governor Cuomo's budget will require the private insurance companies to insure everyone at community rates just like the Blues. "That sounds simple enough," said Sochalski. "What you're actually going to do is level the playing field," she said. "I'm trying to figure out what the leveling is."

The private insurance companies will either lose money, or leave New York, "and you're going to be left with a single payer in New York, and that's going to be Blue Cross/Blue Shield," said Sochalski. After breaking her foot recently, and getting a bill from Blue Cross, the thought of Blue Cross/Blue Shield taking over "is just a touch disturbing to me."

"Perhaps this is a back door way of getting a single-payer system in New York," suggested Sochalski. "Since nobody trusts the federal government or the state government, we'll let Blue Cross/Blue Shield do it."

There are 30 proposals on the House floor for health insurance reform, said Solchalski. "Most of them look as if they have been written by the insurance companies, because they have." In effect, they would move money from the public treasury to the insurance companies, she said. But one proposal, by the National Health Care Leadership Coalition, has a very broad spectrum of supporters, including ex-presidents Carter and Ford, the United Auto Workers and Chrysler, and physician groups.

Think of the health care system as two pots, said Sochalski. One pot is the financing pot, which collects money from employers, out-of-pocket payments, taxes, and other sources. The big debate is over how much of the pot should be government controlled. The other pot is the delivery side. "That's basically private," she said. On the private side, people have been doing whatever they want.

The trick is to keep the two pots in line, said Sochalski. Up to now, we have been trying to control expenditures by controlling how we pay for services, she said. "You tweak and move," she said. "And I did it as a policy person in the federal government." But, on the delivery side, "these people have figured out how to get around it. They're years ahead of you."

"How can we shift some of that around so we have access to Epogen, but that people don't have to go without prenatal care?" said Sochalski. "The infant mortality in the Bronx is frightening."

"We're in a for-profit system," said Segal, "and like it or not, these are the rules." Large corporations pay for 60-70% of the health care, and if doctors and hospitals make too much money, the corporations will take steps to cut their losses, he said.

--Norman Bauman