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MUTUAL SERIES FUNDS'
MICHAEL PRICE ET AL.
(continued from preceding
page)
BUT 7-1/4 TIMES CASH EARNINGS WORKS FOR ME.
Garea: The pricing environment would have to continue in 1997 like it was in 1996.
OID: So a continuation of today's pricing environment would turn it into a mistake?!
Garea: Where people would basically significantly undercut each other on pricing relative to actual costs and where medical costs continue to rise as they have in 1996 - and, therefore, you have another year of declining margins.
OID: So competition could turn it into a mistake?
Garea: It's kind of funny, but I have to tell you that some of the worst damage is self-inflicted.
OID: There's no need to get personal.
Garea: Yeah. Some of it is certainly competition. But a big part of it has been self-inflicted. These guys just kind of missed the boat.
OID: They thought they could hold down costs more than they did?
Garea: They made incorrect assumptions about medical cost trends. They basically all assumed that 1996 was going to be a continuation of the trend in 1995 - which was a decline in medical costs. And medical costs didn't go down in 1996. They turned around and went up.
And when medical costs started to rise and HMOs had priced their product assuming a decline, that obviously wreaked havoc on their bottom line.
OID: Gotcha.
Garea: Clearly competition plays some role in that. But I think that it was, to a pretty significant extent, a case of people just mismanaging the business. In contrast, today, people are talking about price increases on average at HMOs of 5-6%. And medical costs are going up, but not anywhere near that much.
OID: I understand that Oxford...
Garea: I know what Oxford does. And I have looked at it. But it's not our kind of stock.
OID: Because it's selling for a high P/E?
Garea: "High" isn't the word.
OID: It's been accused of being well run.
Garea: I don't doubt that it's a well run company, but it trades at 50 times earnings.
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