PacifiCare Sees Third-Quarter Profit Rise 12%
PacifiCare Health Systems Inc., the nation’s largest operator of Medicare health-maintenance organizations, said third-quarter profit rose more than analysts expected as it raised premiums for employee health care and shed unprofitable business.
Profit from operations at the Santa Ana-based company rose 12% to $71 million, or $1.58 a share, from $63.4 million, or $1.38, a year ago, the company said. PacifiCare was expected to earn $1.55 a share, the average estimate of analysts polled by First Call Corp. Revenue rose about 5% to $2.52 billion from $2.4 billion.
PacifiCare has been leaving markets that serve both commercial customers and recipients of Medicare where it was having trouble making money. It also has been raising employers’ health plan premiums to get ahead of increasing medical costs.
“They have pared back some of the less profitable marketplaces. You’re seeing that impact now,” said John Rex, a Bear Stearns analyst with an “attractive” rating on PacifiCare. “It looks like their pricing is firm and holding.”
Medicare cuts, threats of lawsuits and fear of tighter government regulations on managed care have combined to drive health-insurance stocks down, and PacifiCare shares are among the hardest hit. But investors cheered Wednesday’s news, bidding up the company’s shares $1.50, or 4.4%, to $35.31.
PacifiCare said its medical-cost ratio--the percentage of each premium dollar that goes to medical costs--rose to 87.3% for its plans serving government health programs, from 86% in the year-earlier period, even as it shed unprofitable business.
Analysts said they had expected the increase as medical costs rose, and that PacifiCare is planning benefits changes for its Medicare HMOs that should help rein in those costs next year. The company’s medical-cost ratio for government programs is also down from the 87.5% figure that PacifiCare reported for the second quarter.
The medical-cost ratio for its commercial health plans fell to 80.9% from 82.8% in the year-earlier period, as the company charged employers more for health insurance plans. That’s an indication that the company managed to get the rate increases it needed to keep up with medical costs when it renewed some employer plans in July, as well as when it renewed plans earlier in the year, analysts said.
“The enrollment was in line with what we thought, but the revenue line was a little higher,” said William McKeever, a PaineWebber analyst with a “neutral” rating on PacifiCare.
The company left markets serving about 26,000 customers on Medicare, the government health plan for the elderly, at the beginning of the year in an attempt to reduce its costs and has announced plans to leave more Medicare HMO markets at the beginning of next year. PacifiCare also sold its money-losing Utah health plan for an undisclosed price to an investment group in October 1998.
PacifiCare shares have fallen about 60% since the beginning of June, touched off by a warning about second-quarter earnings. In late June, PacifiCare said it expected second-quarter earnings of $1.45 to $1.50 a share, less than the $1.58 average that analysts were expecting. The company later said its second-quarter net income rose to $68.9 million, or $1.49 a share, from $48.9 million, or $1.06, in the year-earlier period.
