Jeffords Switch Revives Health Care Worry

Democratic control of the U.S. Senate rekindled investor concern on Thursday that legislation seen cutting into the bottom line at drug companies and health maintenance organizations may find new life.

The decision by Vermont Sen. James Jeffords to leave the Republican Party and become an independent on Thursday — giving Democrats a slim one-vote majority in the Senate — could spell trouble for U.S. health firms that had enjoyed an industry-friendly environment in Congress and the White House since President Bush took power.

"The main difference is that the Democrats will now control the agenda in the Senate and they could revert to the typical Democratic approach — which is to point out the evils of industry," said Ira Loss, an analyst for independent research firm Washington Analysis.

Sen. Edward Kennedy, the ranking Democrat on the Senate health, education and labor committee, will likely take its helm and allow greater criticism of the health care industry to be aired.

Remaining items on Bush's agenda, meanwhile, will suffer a setback, including legislation on Medicare drug benefits and a White House-backed patients' bill of rights.

The Senate is now more likely to take up a vote on whether to expand the Medicare program to include prescription drug coverage for seniors and the disabled. Such a program could make the government a buyer of drugs, and thereby give it leverage to demand discounts or even impose price controls.

The plan would be a major expansion of Medicare, which currently only pays for drugs administered in the hospital or at doctors' offices, such as chemotherapy.

The nation's largest drugmakers have said they support such a Medicare benefit. But they want it designed so that the private sector — not the government — determines the price of prescription medicines.

"The pharmaceutical effect is neutral to negative as the decreasing likelihood of a GOP-sponsored Medicare drug benefit is replaced by inaction and the potential for increasing rhetoric from a Democratic Senate looking to 2002," Goldman Sachs said in a research note.

Jeffords' departure increases the possibility that one version of a patients' bill of rights — sponsored by senators Kennedy, Arizona Republican John McCain and John Edwards, a North Carolina Democrat — will be brought up for a vote on the Senate floor, analysts said.

However, chances of that bill, which would expand the rights of patients to sue HMOs and permit multimillion dollar jury awards, of succeeding are slim because the measure would most likely face a filibuster.

"The (Jeffords) switch might make it more likely that the McCain-Kennedy bill will probably be considered on the floor,'' said Roberta Goodman, an analyst at Merrill Lynch. ``But the issue is they still don't have the 60 votes necessary to overcome a filibuster.''

As a result, HMO stocks were mostly indifferent to the Jeffords' news, though drug companies traded lower.

The Standard & Poor's Health Care Managed Care index (SPHMO) was up 6.25 points, or about 2 percent, at 327.1 Thursday with shares of industry leaders such as Aetna Inc. (NYSE: AET) up 10 cents to $24.10 and UnitedHealth Group Inc. (NYSE: UNH) up $1.62, or about 3 percent, at $54.60.

Drug stocks traded lower in mid-day activity Thursday. The American Stock Exchange Pharmaceutical index (DRG), whose component include drug heavy weights such as Pfizer Inc. (NYSE: PFE) and Merck and Co. Inc. (NYSE: MRK), was off 1.6 percent at 395.46.

"One thing that could actually turn out to be positive for the drug companies is that with a Republican in the White House and Democrats in control of the Senate, it could lead to gridlock and nothing will get done,'' said analyst Mario Corso of Leerink Swann & Co.

Many are taking a wait-and-see attitude to predict how health policy could change.

"Bear in mind that all legislation has to be signed by the president, so regardless of what health bill might get to Bush's desk, it's just as likely to be signed or killed by Bush," said Neil Sweig, analysts with Ryan, Beck & Co.

"Health care has not been one of Bush's highest priorities nor will it continue to be in terms of enactment,'' Sweig said.