PacifiCare Operating Profit Grows Slightly

PacifiCare Health Systems Inc. said Tuesday its first-quarter operating earnings rose slightly amid higher premiums and membership, while a 20% stock buyback lifted earnings per share.

Based on shares outstanding, the company’s earnings rose 21%, well ahead of Wall Street forecasts, but an uptick in the managed-care provider’s medical costs sounded warning bells with some analysts.

Santa Ana-based PacifiCare, the largest U.S. provider of Medicare health plans, said operating income rose to $117 million, or $1.94 per share, from $116 million, or $1.61, a year earlier. The per-share results reflect the effects of a 20% buyback of the company’s shares.

Revenue rose to $2.8 billion from $2.5 billion.

Analysts had expected PacifiCare to earn $1.70 a share in the latest quarter, according to First Call/Thomson Financial.

PacifiCare shares traded up $1.81 to close at $56.38 on Nasdaq.

The company’s reliance on a business model that allocates doctors a fixed monthly per-patient fee, however, has led to investor skittishness, and its share price is far below its 52-week high of $100.38.

“The results are not as good as they might look at first blush. The vast majority of the gains are related to share repurchases and other short-term issues,” said Gary Frazier, an analyst at Deutsche Banc Alex. Brown.

He also cited concerns about a higher-than-expected uptick in the company’s hospital inpatient costs, as well as the rates it pays to physicians.

PacifiCare, however, issued a rosy forecast, calling for earnings-per-share growth of 25% this year, compared with profit of $6.23 a diluted share in 1999.

“Medicare is a good business for us. As others exit the market, it creates more opportunities for us,” Brad Bowlus, chief executive of the company’s health plans division, said.

The company, which runs Secure Horizons, the largest Medicare health management organization, said efforts to build membership and improve operations in the first quarter “continue to result in significant top- and bottom-line growth.”

Total membership grew to 4 million at the end of the quarter, a 12% gain from a year ago. The higher membership, along with increased premiums and stable costs for marketing and administration, helped profit.