New Jobs Beneficial, May Lack Benefits-FYI

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By Kim Dixon

CHICAGO (Reuters) - Wall Street cheered unexpectedly robust job growth in May, but health plan executives say many new jobs are not offering medical benefits, a development that has HMO investors rattled.

Wall Street analysts and executives at top health maintenance organizations are projecting tepid enrollment growth, and cautioning that new jobs do not necessarily equate with market growth.

"It's fair to say that a lot of jobs that are being created may not be the jobs that come with benefits," Ron Williams, president of Aetna Inc. (AET), one of the biggest U.S. health insurers with 13 million members, told investors in early June.

That echoes recent comments by others in the industry including William McGuire, chief executive of UnitedHealth Group (UNH), the biggest U.S. health plan with 18 million members. McGuire said Wall Street tends to overstate the connection between economic growth and HMO enrollment.

Membership growth in health plans is slowing, causing concern among leading industry analysts that companies may begin to compete by trimming price increases -- a tactic that could squeeze profit margins.

Analysts who follow the big publicly-traded health plans in general have even more grim enrollment forecasts than the companies themselves.

"We expect the public companies should report relatively uninspiring average enrollment growth in the 2 to 3 percent range in 2004 and 2005," J.P. Morgan analyst Scott Fidel wrote in a recent research note.

Shares of the big publicly traded HMOs, as measured by the Goldman Sachs Managed Health Care Index (GSPHMO) are up 10 percent this year, though analysts fear the years-long run of healthy stock gains may be winding down.

The Labor Department on July 2 will release a new jobs report for June.

JOBS OPTIMISM

Nearly a million U.S. jobs were created in March, April and May, marking the strongest three-month stretch in four years and ending years of worry about a weak job market.

Stocks bounced on the May report, which implied companies have grown confident enough about earnings to finally build up staff.

But the supply of private sector jobs with benefits has been declining over the last decade, according to the Bureau of Labor statistics.

In 2003, 45 percent of employees had medical coverage through employers, down from 63 percent a decade earlier, according to government figures.

The cost of benefits, which make up nearly a third of total compensation paid by employers, surged 6.3 percent last year, more than double the rise in wage and salary costs.

Several companies at a recent Goldman Sachs health-care conference said that small and mid-sized employers were expressing caution at offering jobs with benefits, according to Goldman analyst Matthew Borsch.

Much of the new job growth is coming from smaller-sized businesses, according to Harvard School of Public Health expert Robert Blendon.

"The share of total jobs by small businesses has gone up, so in general, they are less likely to offer full benefits," he said.

STEAL SHARE GAME

HMOs and their investors have been concerned about the jobs situation in recent months -- even before the better-than-expected data came out.

Because health plans compete either by adding members or trimming price hikes, analysts prefer membership gains to skimming price increases -- which trims margins.

"There is no question that the overall insurance market is not growing dramatically in total," said Mike McCallister, chief executive of health insurer Humana Inc. (HUM)

In the mid-1990s, during the mass migration from traditional health insurance to managed care, "all you had to do was be there in order to grow," according to Ken Sperling, a benefits advisor at Hewitt Associates, which advises employers on benefits issues.

The pick-up in new jobs is in its early stages, and once the job market improves, employers will be pressured to offer more jobs with benefits, said chief economist at Wells Fargo Sung Won Sohn.

"The recovery is somewhat middle-aged, but employment (growth) is in its early stages," he said. (--additional reporting by Andrea Hopkins in Washington)