Audio Archives
Client Letters
OID Features Online
OID.com Exclusive
Features
Indexes:
Investors
Funds et al.
Companies &
Investments
Contact Us
About Your
User Name
& Password
Free Reprint
Online Excerpts
Investors in
Our Latest Edition
Companies &
Investments in
Our Latest Edition
About OID
Subscribe
Online Advertising
Online Classifieds
Employment
Opportunities
Portfolio Reports
Home Page
MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
OID: Because?
Garea: Because it's more like a service business - and capital isn't an issue in this business. It's not like it's a financial institution or a real insurance company where statutory capital matters. If you look at a company like United Healthcare, for example, their statutory capital requirement may be something around $7 per share - which they have in cash. But they have $20 per share in cash on the balance sheet. It's just excess cash. These are just huge cash flow generating companies.
Equity capital is essentially meaningless. It doesn't give them the ability to do more business, be more effective in the business or anything. It's just not relevant.
OID: Even if that is true today, aren't their returns ultimately likely to get forced down by competition to the point where price-to-book becomes more relevant?
Garea: I don't think so.
OID: I read a statistic recently that HMOs already have a 25% market share in the U.S. As that share continues to grow and they increasingly compete with each other, aren't margins likely to get forced down - perhaps substantially?
Garea: That's an interesting question. But you could make the same argument about newspapers: "Now that The Cleveland Plain Dealer has a 70% market share in Cleveland and The Detroit Free Press has a 60% market share in Detroit, because they have this high penetration rate, won't they compete with each other and drive down returns for each other?"
But it doesn't work that way, does it?
OID: And that's a very interesting analogy - regulatory issues aside. But I'm not sure...
Garea: It's not a perfect analogy. But I'm not sure a higher penetration rate necessarily leads to lower returns. Four or five years ago, most HMOs were making so much money that they thought they were geniuses and that they could make that money anywhere. So they willy nilly decided to expand into all kinds of new markets.
But they learned that it really doesn't work that way. It's not that simple. If somebody has 20-40% market share someplace already and you're trying to start up there, it's not so easy to make money. In fact, it takes a long time before you can make money. The competition can make it take as long as they want for you to not make any money because they already have doctors' networks in place.
OID: And have already achieved serious economies.
Garea: Exactly. They're in that market. So when you come in and talk to the local doctors or local hospitals and say, "Hey, I have 3,000 members here. Tell me about the discount you're going to give me," the guy is likely to look at you and say, "Take a hike."
So it doesn't work that way. And I believe that HMOs have discovered that.
OID: Gotcha. And Health Systems is well rated, etc.?
Garea: Yeah. I'm not saying there's not competition. There's competition in almost every business. But the idea
Page 22 of 28
15 | 16 | 17 | 18 | 19 | 20 | 21 | 22 | 23 | 24 | 25 | 26 | 27 | 28
|
(Return to Table of Contents) |
(continue to the next page) |
©Copyright 1996-2008 Outstanding Investor Digest, Inc. All rights reserved.
295 Greenwich St., Box 282, New York, NY 10007 (212) 925-3885