Despite stresses within the U.S. health-care industry, bankers are still bullish on the sector.

At a conference here last week, many bankers said they were stepping up lending, merger advisory, and other services for the sector. The sheer size of the industry, they said, makes it all but impossible to ignore.

"Health care is increasing as a percentage of the gross national product," said Robert J. Mueller, the chief credit policy officer of Bank of New York. "And as long as that continues, there will be banking opportunities."

The optimism comes despite some high-profile problems for two of the health-care industry's largest players. Columbia/HCA Health Care Corp. has been snarled in an ongoing federal fraud investigation, and Oxford Health Plan has seen its stock price plummet more than 80% since last summer because of financial woes.

But even these two recently received large credit facilities. In February, Chase Manhattan Corp., NationsBank Corp., and J.P. Morgan & Co. started syndicating a $7 billion loan for Columbia/HCA; and Donaldson, Lufkin & Jenrette recorded a $200 million bridge loan for Oxford, according to Securities Data Co.

Bank of New York is increasing health-care lending as a portion of its total commercial lending, Mr. Mueller said.

Others are turning up the heat in mergers and acquisitions advice.

"We are actually in a significant growth mode," said Doug Braunstein, managing director in charge of global health-care for Chase Securities Inc. He said Chase has added four senior managers focusing on health-care M&A in the last year.

That's not to say bankers are throwing caution to the wind. To the contrary, many walked away from last week's Robert Morris Associates conference convinced that the health-care industry is under more pressure than even the troubles of Columbia and Oxford might suggest.

"The process of industry consolidation, and now a certain amount of deconsolidation, has made us somewhat cautious relative to certain types of risks such as systems integration," said Mr. Mueller of Bank of New York.

Several health-care companies have suffered reduced earnings because of poor integration of merged systems, including Oxford, PacifiCare Health Systems, and Aetna Inc.

Many observers expected the heated mergers and acquisitions market to cool after Columbia/HCA halted a buying binge. Columbia pulled back because of the fraud investigation. But health-care M&A activity is at an all-time high.

Much of that activity is fueled by consolidators transforming not-for- profits into for-profit ventures. Restrictions on Medicare and Medicaid disbursements are driving much of this consolidation, forcing the medical profession to become more efficient, Mr. Mueller said.

"That pressure is going to increase," he predicted.

Some banks that are building a presence in M&A advisory have chosen health care as one of their chief sectors to focus on.

"There will be fewer players in few years' time," said Chase's Mr. Braunstein. "But the balance of business will run as it exists today. Cost- effective health care will continue to be an ever-increasing part of the landscape."

Helping fuel the consolidation is a drive to establish regional managed care networks, said Scott Berman, a senior manager with Ernst & Young's corporate finance group.

He also told the conference that he expects many large not-for-profit hospitals to merge with for-profit companies. Alternately, he said, some not-for-profits might merge with each other to achieve economies of scale and tax advantages.

Despite all of the M&A activity in recent years, about 85% of hospitals remain not-for-profit facilities, Mr. Berman said.

But some conference participants said they expect the rate of health- care industry consolidation to decrease in the near future.

"The industry consolidation has moved at a very rapid pace," said John David Chapman, vice president of treasury management services for Atlanta- based SunTrust Banks. "But that rapid expansion is going to slow down as people get their bearings and turn their attention toward the business process."

Mr. Chapman also said the big rises that some analysts are predicting in health-care costs will force many businesses to refocus on managing costs.

Though health-care costs have climbed at a generally steady 3% annually over the last four years, they are expected to rise as much as 7% this year, and reach double-digit growth by 2000, according to New Rochelle, N.Y.-based Health Care Research Group.

Some bankers said they viewed this business climate as an opportunity.

"Because some banks are shying away from health care, we can pretty much cherry-pick the best long-established practices," said William Perotti, executive vice president of San Antonio-based Frost National Bank, the largest independent bank in Texas, with assets of about $6.5 billion.

Mr. Perotti, Frost's chief credit policy officer, said the bank considers health care a very promising industry. Frost increased its commitment to health care by about 40% last year, ending 1997 with about $130 million in loans committed to the industry. Some of that was done by acquiring smaller Texas banks.

Most of those loans are to private physician groups, according to Mr. Perotti. Frost also lends to large Texas hospitals, but has never made a loan to a managed care group.

"We're comfortable with doctor groups, because we understand that segment," Mr. Perotti said. "San Antonio and Houston are not headquarters for any big HMOs."

He said the bank assesses health-care loans very carefully, keeping an eye on the problems the industry is going through. "We will spend as much time assessing the administration side of the business as we will assessing the doctors' ability to generate business," he said.

Frost also began sponsoring in-house health-care discussion groups for its bankers about a year and a half ago. The bank invites industry experts such as accountants, lawyers, and retired physicians to come in and speak with bankers about the trends shaking up the industry. The bank has since applied this practice to other industries.

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