Dear Mr. Berko:

Would you recommend three or four health insurance companies for a three- to four-year investment? I think this industry may be undervalued and that there may be good profits in these stocks.

When you spoke to our large group in March of last year, you indicated that you were in favor of a national health insurance single-payer plan. Considering the recent changes in Medicare, the new prescription drug plan and others that will be implemented by Congress, do you still favor national health insurance?

W.P., Seattle

Dear W.P.:

In the past several months, myriad readers have asked me about the health insurance industry and which of the health insurers, if any, I would recommend.

Well, I gotta tell you that I may know more about the health insurance industry than most non-industry people. A close client is a retired hospital administrator, my son is a physician, two clients own health insurance agencies, several of my friends are physicians and I occasionally enjoy the company of two people who are top executives in the health insurance industry.

So as candid as I can be, I am unable (in good conscience) to place my imprimatur on any of the companies in this industry. That would be like asking me to nominate my favorite personality in the Nazi Party for the Noble Peace Prize.

I can tell you that the November Medicare reforms are expected to be a juicy boon for the managed-care industry. Those changes should enable most health insurers to squeeze new and hugely enormous profits from Medicare. And the recovering economy, which is creating new job growth, is certain to increase health insurance enrollments this year and next.

Margins in the industry are experiencing healthy advances as employers continue to pass on higher premiums to employees through new cost-sharing initiatives and much higher co-pays. Outpatient clinics are aggressively providing less costly care than hospitals via a hardhearted “get them in, sew them up and get them out” assembly-line process demanded by health insurers. These and other uncaring, disputatious policies bode well for revenue and earnings growth.

The prospect of higher revenues and greatly improved earnings has positioned health insurance stocks for potentially robust price appreciation over the nest few years. Why not? This industry is collectively expected to report hundreds of billions of dollars of gross profits this year and next.

So I’m reluctant to tell you that the suits on Wall Street favor UnitedHealth Group Inc. (UNH-$61.52) and expect per-share earnings to increase from $2.96 last year to $3.73 this year and $4.55 in 2005. Value Line’s George Rho thinks UNH could trade between $125 and $135 in the coming three to four years.

I feel like a snitch telling you that PacifiCare Health Systems Inc.(PHS-$37.67) believes its 2003 earnings of $1.88 per share will increase to $2.80 this year and $3.27 in 2005. Rho places PHS’s potential share price between $90 and $100 by 2006-2007.

And I feel like a fink recommending Humana Inc. (HUM-$20.75), which earned $1.40 per share last year. The company thinks earnings in 2004 will be $1.70, and that 2005 earnings may come very close to $2. Erik Manning, who follows Humana for Value Line, puts a low $40s price objective on HUM in the out years.

I also think it’s dishonorable to mention Aetna Inc. (AET-$80.20), which earned $2.90 per share last year, believes it can improve earnings to $5 this year and $6.50 in 2005. Manning has a $140-plus price target for AET by 2006-2008.

And no, I never advocated a national health-care system run by the federal government. What I said to you folks in Seattle was that I favor a public, quasi-government organization like Fannie Mae or Sallie Mae that would be funded by a combination of payroll deductions and mandatory life insurance policies.

I commented that more than $1.1 trillion (that’s 12 zeros) was spent in 2002 just for health-care administrative paperwork. That number, according to Harvard Medical School, rose to $1.3 trillion in 2003. Certainly, that number could be compellingly reduced by eliminating the nation’s several hundred private insurers and folding their collective and ridiculously unproductive and redundant overhead into several quasi-government health insurers. Be mindful that $1.3 trillion (assuming a U.S. population of 300 million) is more than $4,000 for every man, woman and child in this country.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net.