PacifiCare Admits Overcharging Government

PacifiCare Health Systems Inc., the giant managed health care company, disclosed Wednesday that it apparently overcharged the U.S. government millions of dollars for health services for federal employees.

The Cypress-based company said it put $25 million into a reserve account to handle potential government claims for the last six years. Its decision mirrored a move last May by its Orange County rival, FHP International Corp., which set up a $45-million reserve for possible overbilling on its federal contracts.

Both actions come in the wake of the Clinton administration’s stepped-up scrutiny of many health plans nationwide that together serve 10 million government employees, from postal workers to agency administrators to congressional staff.

PacifiCare officials said the overbilling issue arose internally several months ago, but the company postponed disclosing the matter until it could pin down the impact. Company spokesman David Erickson said “it’s pretty apparent” that PacifiCare overcharged the government.

However, he blamed the overbilling on honest “errors” by the company. “We didn’t consciously and knowingly go into [government contract] negotiations and charge them too much,” he said.

PacifiCare aims to negotiate a settlement with the federal Office of Personnel Management, which manages federal health benefit plans.

In contrast, FHP’s long-standing dispute with the agency recently was handed over to the Justice Department for investigation. The matter has yet to be resolved, said spokeswomen for the agency and the company.

Alan Hoops, PacifiCare’s president and chief executive, attributed the company’s billing discrepancy to its failure to give certain government employees the cheapest premiums available. The government requires PacifiCare and other health plans to make sure rates on federal contracts match the lowest rates available locally.

Hoops said that while groups of commercial employers in recent years have negotiated lower premiums, those reductions weren’t always matched in federal contracts. He noted, too, that the federal government has toughened its rules on how rates are set.

PacifiCare, which serves 65,000 federal employees, will use the $25-million reserve to cover both overcharges found by government auditors for services provided from 1990 to 1993, as well as billings for 1994 and 1995 that haven’t been audited yet, company officials said.

“Nobody knows exactly what [our] liability will be, including the feds,” Hoops said.

The $25-million reserve was part of $42 million in special charges that PacifiCare listed Wednesday for its third quarter. The company decided to take a sizable hit against earnings and move on, Erickson said.

Among other items, the company took a $9-million charge from the sale of its network of nine clinics and 50 doctors in south Florida to a physician management company. It also took charges for consolidating administrative operations for its plans in the Southwest and Northwest and eliminating its line of workers’ compensation services.

Overall, the company reported that earnings fell 72% in the fiscal third quarter to $8.6 million, or 27 cents a share, from $30.2 million, or 97 cents a share, for the same period last year. Revenue in the quarter ended June 30 rose 22% to $1.2 billion from $981 million.

While analysts weren’t expecting the company to take the reserve for the government claims, they weren’t fazed. They pointed, instead, to the 20% increase in the company’s operating earnings to $36 million for the quarter as a better indicator of its prospects for the future.

The company’s stock closed Wednesday at $63.75 a share on the Nasdaq, up 50 cents.