PacifiCare Cites Expansion, Benefit Payments for Lower 3rd-Period Net
Citing increased benefit payments and costs arising from expansion into two new states, PacifiCare Health Systems Inc. reported lower net earnings Monday for the fiscal third quarter and nine months ended June 30.
The rapidly expanding Cypress health maintenance organization said net earnings during the quarter fell 54% to $771,000 from $1.7 million. During the quarter, however, year-to-year revenue increased 105% to $48.5 million from $23.6 million.
Among factors affecting the quarter, said John Siefker, PacifiCare’s chief financial officer, was a stiff increase in the medical loss ratio--the percentage of premiums from health plan participants paid out in benefits. During the quarter, that ratio grew to 86.5% from 75.8% a year earlier, largely due to new enrollments of senior citizens, who tend to require more medical care on the average, Siefker said.
Medicare patients enrolled in PacifiCare’s “Secure Horizons” plan account for about 40% of revenue; that figure is expected to increase to 50% by the end of calendar 1986, Siefker said. Consequently, the medical loss ratio should increase through the end of the year.
For the nine months ended June 30, PacifiCare reported net earnings of $2.1 million, off 51% from $4.3 million last year. In addition to the increased medical loss ratio, Siefker said, the soft earnings resulted from increased prescription drug expenditures and costs associated with PacifiCare’s expansion into Oregon and Oklahoma. Last month, the company began operations in Texas.
Revenue during the period grew 76% to $116.2 million from $66 million in 1985. PacifiCare attributed the revenue gain to strong membership growth this year.
At the end of June, membership in California, Oregon and Oklahoma totaled more than 167,000, up 57% from last year. PacifiCare rapidly “is getting up there as one of the largest regional HMOs,” said Larry Selwitz of Bateman Eichler, Hill Richards’ Los Angeles office.
Although PacifiCare has been widely regarded both by competitors and analysts as one of the best-run HMOs, the company suffered a staggering 96% drop in net earnings during the previous quarter, the result of an unusually high number of catastrophic illnesses and procedures, as well as increased spending on drugs and care for seniors.
During the third-quarter, the company dropped prescription coverage for new members in its senior plan and enacted cuts in overhead spending, Siefker said. Additionally, PacifiCare is conducting negotiations with the doctors, hospitals and other providers it contracts with to obtain improved terms, he said.
However, Selwitz suggested, PacifiCare may also have to raise member co-payments and enact tougher utilization review procedures in order to bring earnings back into line. “A 100% increase in revenues is incredible,” Selwitz added. “Now the question is what are they going to do to bring their costs under control.”
