Foundation Health’s Profit Falls 43% on Increased Costs

Foundation Health Systems Inc. said Tuesday that second-quarter profit fell 43% as the managed-care company suffered from an increase in health-care costs, especially in unprofitable Medicare programs.

Woodland Hills-based Foundation, one of California’s largest health insurers, said profit from continuing operations before a charge fell to $31.3 million, or 26 cents a diluted share, from $54.8 million, or 43 cents, a year earlier.

Earnings were hurt by a greater-than-expected increase in medical costs of its Medicare plans in the Northeast, the company said.

Shares of Foundation Health fell 50 cents to close at $17.31 on the New York Stock Exchange.

Foundation President and Chief Executive Jay Gellert said the company will pull out of Medicare programs in 10 rural Northern California counties and move to turn around unprofitable programs in the Northeast, which are losing more money than the company had forecast.

“We cannot tolerate unprofitable Medicare business,” he said in a conference call with investors.

In a bid to make all Medicare programs profitable by next year, Foundation has told regulators it plans to raise premiums and cut back benefits from Jan. 1 in some markets, Gellert said. It will reduce the scope of those cutbacks if it can persuade doctors to sign contracts to treat its patients in exchange for fixed monthly payments, he said.

The second-quarter results were in line with the 26-cent-a-share forecast of analysts polled by First Call Corp.

After a charge of $30 million, or 25 cents a share, Foundation reported net income of $956,000, or 1 cent.

In the year-earlier period, the company took merger-related charges of $260 million, or $2.07 a share, resulting in a loss of $200.1 million, or $1.60 a share, including discontinued operations. Second-quarter revenue rose 26% to $2.24 billion, from $1.77 billion.