SAN FRANCISCO -- Never again can an investor put tax-exempt health care securities "under the pillow and not have to worry," a hospital analyst told the California Society of Municipal Analysts last Friday. Historically, the hospital industry has been "the best-performing" municipal sector, said Glenn Wagner, a vice president with Morgan Stanley & Co.

"I can't make that statement any longer," Wagner told 80 analysts attending a day-long conference on health care at San Francisco's World Trade Center. With the exception of "a handful" of tax-exempt issuers, "this is not a sector you can buy and hold any longer," he said. "Life on the credit side has changed dramatically."

Wagner was one of several speakers who discussed possible changes in the hospital industry sparked by President Clinton's health care reform plan.

Clinton's comprehensive proposal has prompted a national debate over universal access to health care services for all Americans.

Enactment of health care reform legislation should not provoke "any massive downgrades of health care credits in the marketplace," said Joan Pickett, a director of municipal finance at Standard & Poor's Corp.

The rating agency believes that no matter what version of health care reform is approved, revenues that now go into the health care delivery system will decline, Pickett said.

"It is clear that [under reform], revenues will be squeezed from the system," Pickett said. "That will result in reduced margins and profitability in a number of health care institutions."

But Pickett said declining revenues would not necessarily result in "reduced credit quality" for health care issues. "We anticipate that stronger institutions will take advantage of their market strengths, cost structures, and relationships with physicians, and become even stronger despite pressures on the financial side," she said.

Pickett said states will "pursue their own solutions irrespective of what happens in Washington. Legislative reform [at the federal level] in some regards is not as meaningful as what is already occurring in the marketplace."

"Every state but two in the last year has had some form of legislative initiative for health care reform under consideration," she said. "That goes to show you that everyone has hopped on the bandwagon."

Dennis M. Farrell, a vice president and assistant director with Moody's investors Service, said health care reform can be characterized as a "health care revolution."

Farrell said the health care debate "should be very interesting [during] the next couple of years. One thing I can guarantee -- the President's plan, as we know it, will not be adopted" because there are at least four other competing plans.

Morgan Stanley's Wagner said, "the market increasingly is becoming wary and more pessimistic [concerning] what's going on in the health care industry."

Health care "in the not-too-distant-future" will be "a volatile sector" and "more predatory," Wagner said.

Whether a hospital is for-profit or not-for-profit, "we are going to see more physician integration, strategic alliances, and hospital consolidations," he said.

Wagner called on investment bankers to re-examine "some of the age-old values [in hospital analysis] versus the new reality." Hospitals today "are cost centers, not revenue producers," and that change must be explained to investors. "We as investment bankers need to improve disclosure," he said.

Various health care proposals being talked about are "serving as a catalyst, certainly, but there's a lot going on each day" in regional markets, Wagner said. "Market forces really are shaping changes" in health care.

He said chances "are greater than fifty-fifty" that. the nation will "see substantial [health care] reform by next August" because "all the House and half the Senate" are facing re-election in November 1994.

"Frankly, the Democrats can't go back home next fall without having passed something," Wagner said. Assuming that the "Clinton health plan or some variation of managed competition does go through, insuring the uninsured has dramatic economic implications for various regions of the country."

Wagner said there is a high uninsured population in the West and the South. "Those regions are going to get dramatic support from the federal government," he said.

In contrast, the Northeast and Midwest have "high income, low uninsured" rates, which will result in "very little" federal support, Wagner said.

"If anything, businesses will get hurt" in the Northeast and Midwest by adoption of health care reform, he said.

In other business at its fall meeting, the California Society of Municipal Analysts elected officers for 1994. Chairman is Steve Zimmermann of Standard & Poor's, vice chairman is Rafael Costa of the Franklin Group of Funds, and secretary-treasurer is Steve Permut of the Benham Group.

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