PacifiCare Plans Major Revamping to Reduce Reliance on Medicare Money

Citing a “cloudy” future for health maintenance organizations that enroll Medicare beneficiaries, the nation’s largest Medicare managed-care company on Thursday announced a major restructuring designed to dramatically reduce its reliance on the government-funded program.

In five years, Santa Ana-based PacifiCare Health Systems Inc., whose Secure Horizons Medicare HMO has 1 million members nationwide, plans to increase its non-Medicare HMO business by 47%, the company said.

The move to expand its position in the difficult but potentially more lucrative business of selling health insurance to employers comes just days after PacifiCare and other major HMOs said they would raise their rates next year for the cost of office visits and prescription drugs for Medicare recipients.

The company’s restructuring also follows decisions by several HMOs to quit the Medicare business in several markets. PacifiCare’s action Thursday stirred concern among consumer advocates who fear that the company could be positioning itself to quit Medicare altogether, and that other smaller players would follow suit.

“If you’re not building, you’re disentangling,” said Jamie Court of the advocacy organization Consumers for Quality Care. “For the nation’s largest Medicare HMO to say it wants to focus on its commercial business means that it doesn’t see a future in serving Medicare patients anymore.”

Alan Hoops, chairman and chief executive of PacifiCare, said the company remains committed to Secure Horizons, which is the nation’s dominant Medicare managed-care plan. But he conceded that a continuing slump in the company’s stock has been fueled by Wall Street’s jitters over the company’s growth prospects as the government tries to rein in Medicare spending, and that the company’s new focus was aimed in part at relieving those concerns.

“Virtually all of our counterparts have made no bones about the fact that they are all but exiting the business,” Hoops said Thursday. “Are we concerned? You bet we are.”

He said, however, that the company does not plan to quit selling managed care to seniors. Rather, PacifiCare plans to increase its commercial business by buying small HMOs that are struggling in today’s difficult marketplace.

“We’ve already purchased several small HMOs,” Hoops said. In about five years, the company hopes revenue from its commercial businesses will equal that of its Medicare businesses, he said. Currently, revenue from Medicare is $1.4 billion, while revenue from commercial accounts is $982 million.

But Todd Richter, the lead health-care analyst for Banc of America Securities in New York, said the restructuring does not immediately address investors’ concerns. The stock, which dropped $4.75 a share on Nasdaq to close at $52.19, has lost about half its value in four months.

Hoops said he’s frustrated by the stock’s poor performance because PacifiCare’s shares have tumbled even as the company is on track to report growth in earnings per share of about 40% to 45% this year from the $4.40 a share it reported last year.

Wall Street is leery about two things, Richter said: PacifiCare’s large Medicare business and its aggressive practice of paying medical groups a set monthly fee for expenses incurred by its patients.

The company took steps to improve in both areas on Thursday, by announcing the expansion of its commercial health plans and by beginning to loosen some of its physician-group pay arrangements.

But it is too soon to see how far the company will go with its plans.

“Over time, if it does increase the commercial business, that will help, but it will only do that if those businesses really grow,” Richter said.

Carol Jimenez, a consumer rights attorney who has represented several Medicare patients in cases against PacifiCare, criticized the reorganization, saying that the company should devote its resources to improving care, not placating Wall Street.

“They should put more emphasis on doing a good job,” Jimenez said. “In the long run, that should help their stock price more.”

Along with its restructuring, PacifiCare also said that its chief financial officer, Robert Stearns, had resigned--a departure that some saw as the reason for Thursday’s stock decline.

A company spokeswoman said that Stearns, who was brought in a year ago to help turn the company around, left because he “disagreed with the vision in our strategic plan.”

Stearns was not available for comment. The spokeswoman said that he had moved to his family home in Arizona and would pursue other interests.

Hoops said the newly purchased HMOs and Secure Horizons will be housed in a new health-plans division, which will have its own president and officers.

Two other new divisions have also been set up. One will handle other lines of business such as prescription drugs and dental and vision care; and another will sell non-Medicare services to seniors.

Creating the three new divisions makes sense, Richter said, because it organizes the company’s businesses in related categories, rather than by geographic area.