Secure Horizons to Freeze Membership in 24 Calif. Counties

Secure Horizons, the nation’s largest Medicare HMO, said Thursday it will freeze membership next year in 41 counties nationwide, most of them in California.

The announcement that new members will not be accepted in 24 California counties, among them Riverside, San Bernardino, Santa Barbara, Kern, Alameda and Contra Costa, came as Secure Horizons’ parent company reported disappointing results for the third quarter, though they beat estimates.

Santa Ana-based PacifiCare Health Systems Inc. also said it would implement dramatic premium hikes in 2001, ranging from 10% to 25%, for its 3 million non-Medicare members.

PacifiCare, which had originally been projected to earn $1.90 a share in the third quarter before issuing a profit warning, instead reported net income of $5.2 million, or 15 cents a share. And that figure was inflated slightly by the inclusion of a one-time credit, without which income would have been $1.4 million, or 4 cents, said acting President and Chief Executive Howard Phanstiel.

Revenue rose 14% to $2.9 billion from $2.5 billion. In the year-ago third quarter, the company earned $69.3 million, or $1.54 a share.

“We’re obviously very disappointed with our third-quarter results,” said Phanstiel, who had been serving as chief financial officer before the abrupt departure of the company’s CEO, Robert O’Leary, last month.

In October, PacifiCare signaled that it would either break even for the quarter or lose up to 10 cents a share as a result of rising medical costs, news that sent the company’s stock plunging and prompted the resignation of O’Leary after just three months on the job.

On Thursday’s news, which showed earnings slightly better than those October projections, PacifiCare’s stock gained 15% in after-hours trading to $12.25. The results were released after the close of regular U.S. trading. The shares had finished the regular session up 44 cents at $10.69 on Nasdaq.

In the weeks since O’Leary’s departure, remaining officials have been scrambling to develop a turnaround plan for the company, which is struggling to reinvent itself after the health-care market forced expensive changes to its business model.

PacifiCare, which relied for years on a system that forced hospitals and doctors’ groups to absorb all of the financial risk of caring for patients, now must switch to a new approach, in which PacifiCare absorbs the risk and providers are paid for each procedure they perform.

That exacerbates the financial strain on the company’s Medicare business, because the federal government pays a limited amount for each member every month, and PacifiCare can no longer simply expect hospitals and doctors to absorb any extra costs.

In addition to increased costs incurred by the changing business model, the company’s bottom line has been affected by continued bankruptcies and financial instability among the physician groups with which it subcontracts to provide care for members.

To that end, PacifiCare set aside $24 million in reserves for what it called “provider insolvency and uncollectable provider loans.” Included in the reserves are $9.7 million meant to cover the value of a loan made to Southern California’s largest medical group, KPC Medical Management, due to what Phanstiel called a “higher probability” that it will not be repaid.

Phanstiel said the company had not yet decided whether it would dramatically change or exit its Medicare business as part of the new turnaround plan, other than freezing enrollment beginning in 2001 in 41 counties in California, Texas, Colorado, Washington and Oregon. PacifiCare covers 1.1 million Medicare members under its Secure Horizons plan.

Phanstiel said the company expects to lose some members as a result of its plan to raise premiums in 2001, although just over half have signed on for next year despite the hikes. The biggest concern, however, is that those members who choose to pay the higher premiums and stay with PacifiCare might be the sickest members, many of whom cannot switch to other health plans because of preexisting conditions.

The California counties where PacifiCare will be freezing membership in its Secure Horizons managed Medicare plans beginning in 2001:

Alameda, Butte, Contra Costa, El Dorado, Fresno, Kern, Madera, Marin, Napa, Placer, Riverside, Sacramento, San Bernardino, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus and Tulare.