PacifiCare’s Bad Week Ends on a Lower Note
Managed health-care giant PacifiCare Health Systems Inc. disappointed investors for the second time this week, saying Friday it will post second-quarter earnings of from 30 to 45 cents a share--less than half of what analysts had expected.
The company largely blamed unanticipated increases in health-care costs in markets it inherited through its purchase of FHP International Corp. as well as in its own markets.
The news surprised Wall Street analysts who have held PacifiCare management in high regard for delivering consistently on their projections.
Analyst Thomas Hodapp, noting the bombshells the Cypress-based company dropped this week, predicted investors will become more skeptical, regarding it as a “show-me” stock rather than a consistent performer.
PacifiCare’s class A voting stock fell nearly 10%, or $6.50 a share, in Nasdaq trading Friday to close at a 52-week low of $59.375. The company’s widely held nonvoting class B stock likewise slumped 9%, or $6.188 a share, to $62.875.
Earlier in the week, the stocks had taken an even worse drubbing after the company issued a terse warning that second-quarter earnings would be “substantially” below analysts’ estimates, but didn’t provide specifics. The Class A shares dropped $17.25 to $63.75, while Class B stock fell $18.75 a share to $66.75.
In a conference call with analysts Friday, PacifiCare management said FHP’s business had seriously deteriorated late last year. PacifiCare, which acquired its Orange County rival in February, said it discovered problems in claims processing, administrative controls and FHP’s contracts with doctors’ groups.
For example, in Utah, where PacifiCare inherited 200,000 plan members, FHP last year had moved aggressively to go outside its once-captive Talbert medical group and sign up outsider doctors’ groups to care for its members. That left FHP, and now PacifiCare, stuck covering higher-than-expected health-care costs--the costs HMOs generally are trying to shift to health-care providers.
Officials told analysts they intend to attack the problems in Utah--and similar contract problems elsewhere--by boosting premiums this year. It also intends to push more of the risk involved in managing health-care costs onto doctors’ groups.
However, analysts noted that PacifiCare has had mixed success with absorbing acquisitions in the past.
Hodapp noted that nearly three years ago, the company expanded into Florida through acquisitions of two small health plans, struggled with them, then sold them last year.
“That turned out to be a disaster,” said Hodapp, an analyst at Robertson Stephens.
But PacifiCare’s own traditional business has presented problems too.
Its California business, for instance, was hit with higher-than-expected drug costs from price inflation and prescription volume. And unfavorable contracts with providers resulted in unexpectedly high Medicare costs.
Management said its plans to cut costs in California by consolidating claims processing and billing systems once it wins state approval to proceed with the merger of FHP’s operations in the state.
Earlier this year, the FHP acquisition was approved by the state Department of Corporations, which regulates health maintenance organizations.
But the agency required PacifiCare to keep its operations in the state separate from FHP’s until it can come up with a suitable plan for consolidating the two.
PacifiCare management predicted the state agency will approve the restructuring plan within three weeks, but an agency spokeswoman was more cautious. She said the state would take as long as necessary to consider the plan.
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Unhealthy Trend
Pacificare Health System’s Class A (voting) stock tumbled 27.3% in one week:
Friday’s close: $59.38
Source: Bloomberg News
