2005 Trend: HMOs Face Pricing Headwinds

Meanwhile, Bos noted that the two latter companies have also established themselves as leaders in consumer-driven health plans. He expects the increasingly popular plans, often linked to new health savings accounts, to enjoy "exponential growth" in coming years.

"It does not create a situation where CDHPs take over the world before the end of this decade," he admitted. But "I wouldn't be surprised to see around 25% of very large employers offering CDHPs as a choice" over the next few years.

If so, UnitedHealth looks especially well-positioned. In late November, the company inked a deal to buy Definity Health -- which ranks as the largest CDHP provider in the country.

Prudential analyst David Shove, who quickly applauded the deal, noted that Definity boasts twice as much CDHP business as its largest competitor, Aetna. He said that Definity, co-founded in 1998 by a UnitedHealth executive, started with just 5,000 plan members in 2000. But looking ahead, he said, the company expects to be serving some 500,000 customers -- and generating $100 million in revenue -- in the coming year.

"We believe UnitedHealth ... will emerge as the dominant [company] in this fast-growing product segment," wrote Shove, who, unlike Borsch, has a favorable view of the entire group.

Shove also likes the industry's biggest giant. Following its merger with Anthem, he said, WellPoint has emerged as a "new managed-care Goliath" with powerful opportunities for growth. Going forward, he predicted, WellPoint could shake up the industry as a whole.

"As a national managed-care company with a sizable enrollment base ... we believe WellPoint Inc. will redefine the industry's competitive landscape, which may spark a new round of consolidation activity," Shove wrote.

Borsch also likes WellPoint due, in part, to the company's limited exposure to not-for-profit health insurers. But he continues to steer investors away from many others in the group.

Still, even Borsch concedes that the current rally may have a little steam left.

"We continue to believe bullish sentiment will prevail into early 2005 -- up to, and possibly beyond, fourth-quarter earnings season," Borsch wrote. But he added that "we believe the downward competitive pressure on rates is becoming a more important factor ... consistent with our expectation for a cyclical industry downturn."

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