FHP Forecasts Disappointment for 4th Quarter : Health: Instead of 50 cents a share for period ended June 30, the O.C.-based HMO projects about 23 to 27 cents a share.
FHP International Corp., reeling from recent organizational upheavals, said Wednesday that fourth-quarter earnings will be about half of what analysts were expecting.
Analysts had estimated that the Fountain Valley company’s earnings in the quarter ended June 30 would approach 50 cents a share, but FHP said earnings will be about 23 to 27 cents a share as the company struggles with higher administrative and advertising costs and low membership growth.
Analysts interviewed Wednesday after a conference call with company officials expressed chagrin. Dorothy Lee, an analyst with Moody’s Investors Service, described some of the company’s troubles as “somewhat surprising.”
FHP’s stock dropped $1.87 1/2 a share Wednesday to close at $24.12 1/2 in Nasdaq trading.
The company jolted analysts with projections of a pretax earnings shortfall of $22 million to $26 million below expectations. It cited several reasons, including problems stemming from its acquisition last year of TakeCare Inc., a large health maintenance organization.
A failure to mesh the two companies’ operational systems prompted the combined company to spend too much on advertising, officials said. It also was unable to take advantage of savings from the merger, which it had expected to record in the fourth quarter.
And at a time when its big HMO competitors are boasting of huge gains in membership, FHP’s enrollment growth was flat in the quarter. It grew 4.3% in the full year ended June 30, but TakeCare lost 20,000 enrollees after the merger, said Westcott W. Price III, FHP’s president and chief executive officer.
The company also blamed its disappointing estimate on basic problems in its California operations, prompting some analysts to question how much management knows about what’s going on in the trenches. The company was providing care for some members who had not paid their premiums--something that shouldn’t happen, analysts said, because HMO care is supposed to be prepaid.
Price, noting that the analysts’ reaction was understandable, indicated he’s taking steps to improve the California operations. Three of the company’s key executives at its California HMO, including president Christobel E. Selecky, have recently left the company, he said. Selecky couldn’t be reached for comment.
“Someone has to get blamed when things don’t go right--and they were nominated,” observed Kenneth Abramowitz, an analyst at Bear, Stearns & Co.
Price said the company is also tightening up its bill collections. “We were just being too lenient,” he said.
The fourth-quarter earnings shortfall comes on top of a previously reported $75-million pretax charge related to layoffs of 500 administrative employees and other steps associated with FHP’s corporate restructuring.
The company’s reorganization marked a fundamental shift in the way FHP does business--moving from a company that served members through its own hospitals and salaried doctors to one that increasingly contracts with providers and will serve people who aren’t part of its health maintenance organization.
The change included the abrupt departure of FHP’s founder, Dr. Robert Gumbiner, a strong advocate of the company’s traditional structure. The company elected Jack Anderson, an FHP board member and former TakeCare chairman, as its board chairman. Gumbiner became chairman emeritus, but resigned soon after.
With the restructuring, FHP aims to bolster its battered profit margins. Among other steps, the company is trying to sell four hospitals. Price said he’s negotiating with potential buyers, though no deals have been struck.
The company also is moving ahead with plans to shift its network of 500 doctors and 95 dentists into a newly created physician management company called Comprecare Medical Group. The new company is expected to serve 350,000 of FHP’s current enrollees and line up contracts with other insurers.
Price said a number of insurers, including other HMOs, have expressed interest in doing business with Comprecare.
