Shares of Mid Atlantic Medical Services Inc. closed lower yesterday in the heaviest volume in years, as analysts continued to downgrade ratings amid concern of a price war in the HMO industry.
Mid Atlantic Medical closed at $40.625, down $1.125 a share with 4.3 million shares changing hands, nearly seven times its recent daily volume. Since Tuesday, when MAMSI reported its earnings for the quarter had tripled, the stock has dropped 15 percent.
The decline appears to be part of a general loss of confidence by some of the stock market's most bullish supporters of managed care that health maintenance organizations as a group can continue to grow.
The reason: price competition is heating up in markets as diverse as Maryland, where managed care is hot, to Greenville, N.C., where managed care is new, analysts said. The pressure is coming from traditional insurers that have earned profits in recent years and are willing to lower prices to win market share.
Other HMO stocks that fell earlier this week rose slightly yesterday. Foundation Health, whose stock also was downgraded, was up 37 1/2 cents; U.S. Healthcare closed up 75 " cents, and Humana Inc., was up 62 1/2 cents.
On Tuesday, MAMSI reported earnings of 50 cents a share compared with 14 cents in the same quarter last year. That drew disparate reactions from analysts, some of whom questioned a drop in MAMSI's medical loss ratio, or amount it spends on medical care, which fell for the first time in years despite membership growth. The numbers raised concern since lowering the reserve results in a boost in profits.
The Rockville-based company said its earnings were the result of more efficient use of the medical system.
In a conference call with investors yesterday, Smith Barney Shearson analyst Geoffrey E. Harris, whose downgrade of MAMSI stock a day earlier contributed to a sharp sell-off, said he was taking a more conservative approach to HMO stocks for several reasons:
* The number of HMOs and their expansion into new markets for the first time since 1987.
* Heavy price competition from companies such as Employers Health Insurance, a division of EMPHESYS Financial Group Inc., and John Alden, which are reporting large profits and pursuing the untapped small-group market.
* Improved profitability of Blue Cross plans across the country, with the result that they, too, can lower prices to win market share.
All three companies are marketing aggressively in Maryland.
Mr. Harris told investors that despite growth in enrollment, MAMSI's numbers have slowed as a result of the entry of Humana Inc. and HealthWise of America Inc. into Maryland -- a move that could cause prices to drop further next year.
He said he doubts that MAMSI can achieve the 25 percent enrollment growth it needs to sustain earnings and at the same time, raise prices 3 to 4 percent. His own projections call for enrollment growth in the range of 13 to 15 percent and price increases of 2 percent or less.
MAMSI reported a 9 percent overall enrollment growth for the quarter, but the company's HMOs, which bring in the bulk of revenues, grew 2.5 percent, to 482,000 people.
Recent analysts' recommendations to buy MAMSI stock are pegged on the company's ability to increase its enrollment. For instance, Alex. Brown & Sons predicts double-digit enrollment growth for the second half of the year, partly as a result of a new Maryland law aimed at making insurance more available to small businesses.
Yesterday, Alex. Brown analyst Eleanor Kerns reiterated her "buy" rating of the stock.