PacifiCare Profit Climbs 54% on Cost Cuts

PacifiCare Health Systems Inc. said Wednesday that its third-quarter earnings rose 54% from the same period a year earlier, as the Cypress-based health insurer cut its medical costs and increased membership in specialty areas.

One of the nation’s largest Medicare health-maintenance organizations, PacifiCare said net income for the quarter climbed to $67.5 million, or $1.72 a share, from $43.8 million, or $1.20 a share, a year earlier. Wall Street analysts had predicted $1.70 a share.

Revenue for the quarter declined 1% to $2.7 billion, mostly because of a 10% decrease in overall medical enrollment.

As a result of the strong bottom-line performance, PacifiCare raised its full-year profit guidance for 2003 to $6.52 to $6.57 a share from a previously expected $6.45 to $6.55. Earlier this year the company had predicted $4.25 to $4.35 for the year.

“This was their best quarter this year.... The fundamentals for this industry remain very strong,” said William McKeever, a health-care analyst at UBS Warburg in New York.

PacifiCare continues to increase profitability by trimming the number of members in its relatively low-margin HMO plans, exiting unprofitable markets where it works with the government to offer Medicare coverage. PacifiCare says Medicare doesn’t pay enough to cover an increase in medical costs.

Those efforts paid off again in the third quarter: PacifiCare’s medical loss ratio, or the percentage of premium revenue spent on health-care services, dropped to 83.6% from 85.5% in the third quarter of last year.

The company this year raised premiums it charges employers by 18%, helping offset shrinking membership, which fell to almost 2.9 million during the quarter from 3.2 million a year earlier.

PacifiCare continued to add new members in specialty areas, such as in the prescription drug business. Its enrollment in its mail-order drug line was up 51% from a year earlier, and membership in its behavioral health segment was up 24%.

“We’re no longer a one trick pony,” said President and Chief Executive Officer Howard Phanstiel, “We’re building a stronger, more diversified company for the future.”

The company announced its results after the markets closed. PacifiCare’s stock was down 55 cents at $59.25 on the New York Stock Exchange. In after-hours trading, it rose $1.75 to $61.