Home Front: Anthrax Scare Could Make Hospital Shares Healthy

Editor's note: This is the fourth installment in TheStreet.com's Home Front series, a collection of twice-weekly features that examines how American business, society and investing have changed in the post-Sept. 11 landscape.

Anxieties accompanying the spread of anthrax will cause an increasing number of people to seek medical advice, analysts predict.

"Each and every day we find a new group potentially affected," said Sheryl Skolnick, a health care industry analyst with Fulcrum Global Partners, a New York-based brokerage. "You don't know if people are panicking or being prudent."

Indeed, daily news about anthrax cases is multiplying fears. People are seeking professional diagnoses for various ill feelings. Many false scares originate from symptoms caused by inhaled anthrax -- body ache, fever and fatigue also are common to influenza, whose prime season is approaching.

But not every company in the health industry will see a spike in profits from the uptick in demand for diagnoses. The stocks of health insurers may be poor bets. Better returns could come from hospital shares.

No Assurances in Insurance

As investment opportunities, hospitals fare better because their fixed costs generate profits from every transaction. Say an aspirin costs a hospital 10 cents and it sells the aspirin for 15 cents, making 5 cents on every one sold. The more aspirin sold, the more money a hospital makes. In other words, the greater number of people a hospital treats, the more revenue it earns.

Health insurance companies, on the other hand, don't always see a profit with every transaction. In fact, some surgeries, prescriptions and treatments result in a loss for health insurers, whose clients pay a small co-payment and pass along the bulk of the cost to the insurer.

"HMOs only want healthy people," said Skolnick. "Their perfect customer is someone who doesn't get sick." Healthy participants offset costs by paying high premiums without using their benefits. Insurance companies see substantial profits only when the premiums of healthy participants outweigh the costs from the unhealthy who submit bills. Thus, more doctor visits don't necessarily mean more money for an insurer.

To make matters worse, the slowing economy and increasing layoffs will leave more people without health insurance. To counteract the loss of people, insurance companies are charging higher premiums. A recent study from Hewitt Associates, a human resources consulting firm, said that health care insurance premiums are expected to rise between 13% and 18%, depending on the type of plan. At the same time, however, an increasing number of healthy people are using their insurance to check for anthrax contamination and possibly offsetting any profits the extra money from premiums might produce. ...