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B.S., B.A.,

Georgetown University.

Arnold has spent seven years in investment research, specializing in managed care for the last four. Arnold joined

Morgan Stanley Dean Witter

in 1999. Prior to that, she worked in research at

Goldman Sachs,

Furman Selz


Montgomery Securities

and in corporate finance at

Burns Fry,

a Canadian investment bank.

Industry Outlook and Style

"It looks better than it has in four years," says Arnold about the commercial (for-profit) sector of managed health care. The reason for her optimism: In her view, premium rates are finally outpacing medical-cost trends in the large-employer-group segment.

Like first-place winner Roberta Goodman, Arnold recommends

UnitedHealth Group



Wellpoint Health Networks





. The second-place analyst has a buy on UnitedHealth Group and WellPoint and an outperform on Cigna. (Morgan Stanley has done investment banking for Wellpoint.)

According to the Morgan Stanley analyst, these three insurers are better able to manage medical costs and therefore can more accurately assess premiums than their peers can. In addition, she notes, this group has a growing number of self-insured employers: Under this arrangement, employers bear all the risk for medical costs and the insurance companies administer the plans.

However, as optimistic as Arnold is about companies in the commercial sector, she conceded, in her July 17 report, that she expects "the coming year to be one of fits and starts." The industry is always looking in the rearview mirror," she explains, by which she means that insurers must review the previous year's cost trends and from that, project the subsequent year's trends.

A whole year's pricing is dependent on the accuracy of this gauge, and a company doesn't have to be off by much to create "a big oops," she warns. Moreover, she notes, because the industry tends to move as a group, "if one company stumbles on Medicare -- like



did last quarter -- or on an acquisition or on both -- like



did this quarter -- it causes everyone to re-examine the industry."

Still, the fundamentals of the managed care sector remain strong, Arnold observes. She believes that this year's 8% to 9% increase in rates is on target. She is also betting that the industry will set correct rates for next year. In particular, Arnold expects United and Cigna to trade up toward the end of the year, in anticipation of a continued trend toward self-insuring, coupled with healthy, large-group rate hikes.

As for the political environment, Arnold, like Goodman, believes that unless there is a Democratic sweep of both the congressional and presidential races, the patient bill of rights, in its final form, will have little negative impact on the industry.

Ultimately, managed health care is a cyclical business, says Arnold. As insurance rates continue to rise and the costs are passed on to employees, the employees will begin to assess whether they want to remain in employer-sponsored plans, she says. Those who are most likely to need insurance -- those considered to be high-risk -- will remain in plans, while those least likely to need insurance (i.e., the healthy and the young) will see less cost benefit and will choose to join the uninsured. Insurance companies then will have to raise rates even more because they have a higher risk pool. As rates increase, more healthy people leave the system, creating a vicious cycle.

In Arnold's estimation, "We've got a good two years that we can ride the large-group pricing cycle." At that point, another model will be needed, she asserts. The defined contribution plan is one alternative under discussion: In defined contribution plans, companies provide employees with money to buy their own health insurance. Or a completely new model may be adopted.

Arnold was cited as a rising star by voters in's

Analyst Rankings -- Equity 2000

. (See our related

story.) They praise her, too, for her breadth of knowledge of HMOs. One voter adds that she "is one of the finest analysts on the Street."

Stock Pick

Favorite stock for next 12 months:

UnitedHealth Group


"I think the momentum in the share price is going to be driven by the company's ability to exceed earnings expectations. There are two major ways UnitedHealth is well-positioned: First, its exposure to the large-group segment. Second, its massive shift toward self-insuring. We've begun to see some evidence of this trend in 2000. I think it's going to continue and gain force through the course of 2001, into 2002, and I think there's potential here for upside to earnings estimates."

Rate Their Stock Picks:

Which stock do you like best?

Goodman and Arnold: UnitedHealth Group

France: Cigna

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