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Leading analyst and top management from three sector firms examines the Healthcare Services sector in this special 20-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info416.htm

TWST: In a softer economy are corporations likely to try to pass on part of higher premium costs to employees?

Mr. Mains: Yes, that’s an interesting phenomenon. UnitedHealth Group (NYSE:UNH) said that the percentage of non-premium costs borne by employees in their health plans has risen from 11% in 1998 to an expected 17% in 2002. That trend is going to continue. However, I don’t think that there are going to be huge increases in the costs borne by employees, or a complete paradigm shift to defined-contribution-type plans for a couple of reasons. One is that I don’t think that most insurers or company benefit managers are set up to handle a defined benefit plan. Neither are employees; they lack the information to evaluate the cost and quality of healthcare services. The other is that while the labor market isn’t as tight as it was a year ago, there are still a lot of companies scrambling for good employees, and they don’t want to lose them because of a stingy health benefit.

TWST: So what are you telling investors with regard to the healthcare insurers?

Mr. Mains: I think that until there is resolution of the Patient’s Bill of Rights, these stocks are trades. I think that if you can get them cheap and own them for a few points, that’s wise. Some of the larger ones are better insulated from the insurance business and, therefore, warrant higher valuations. My favorite of that type is UnitedHealth Group, which derives only about 25%-30% of its profits from underwriting. But I think that the risk inherent in this legislative overhang should preclude a long-term investment. If nothing is resolved this year, the PBR overhang will continue through next year. If something resembling the Senate bill passes and either President Bush doesn’t veto it (possible) or Congress overrides his veto (not too likely), the long-term outlook could be grim. Those are two pretty unfavorable possibilities.

TWST: Is UnitedHealth Group a trade at this level?

Mr. Mains: I value United at a 12.5 times multiple for its underwritten business and a 30 times multiple for its other businesses. That gives me a 76 price target. So I’d be inclined to buy United shares in the mid-60 range.

TWST: In conclusion, what would your message be to investors who are contemplating putting new money into healthcare services over the next year or two?

Mr. Mains: I think that 2000 was such a good year that it could have led to some indiscriminate buying by some investors. I think that investors have to be a little more selective in 2001, going into 2002. A lot of the valuations that were dirt cheap in 1999 and the beginning of 2000 are now looking a bit dicey, and I think investors have to critically look and determine whether they are accurate representations of what growth rate can be sustained. I think that some industries, such as the hospital industry, continue to have very favorable internal and exogenous dynamics, while other industries, such as the HMO industry, could be under some pressure as a result of the economy and legislative threats. The challenge of investing in healthcare services is that it’s not just the internal issues, it’s the external issues; it’s the reimbursement and regulatory controversies that investors have to stay on top of. There are segments of the industry that currently have these factors working in their favor, and I think they are where the best returns are going to be in the near term.

This special issue includes:

1) Healthcare Service Providers - In an in-depth (6,300 words) Analyst Interview, Robert Mains, Senior Healthcare Analyst at Advest, Inc., examines the outlook for the sector and shares specific stock recommendations.

2) CEO interviews (average 2,500 words). Top management of three sector firms examine the outlook for their firm and the sector.