PacifiCare’s Stock Hit by Profit Warning

Shares of PacifiCare Health Systems Inc., one of the nation’s largest managed-care companies, plunged 52% Wednesday after it said higher medical costs will cause it to fall well short of Wall Street expectations.

The Santa Ana-based company said late Tuesday that it expects to break even or lose up to 10 cents a share for the third quarter. Analysts had expected PacifiCare to make $1.90 a share, according to a survey by First Call/Thomson Financial.

The warning stunned investors and sent shares of PacifiCare down $16.94 to $15.69 in heavy trading on Nasdaq.

PacifiCare said its earnings for the rest of the year will not meet previous estimates. The company blamed the higher costs on more members going to the hospital than last year and said it will put more money in its reserve to cover the increased claims.

PacifiCare also said it will not accept new members in its Medicare program until it completes a review of its business to try to contain costs.

PacifiCare is the nation’s largest Medicare HMO, with nearly 1 million members. Overall, PacifiCare has about 3.7 million members. The health maintenance organization serves nine states, primarily on the West Coast and in the Southwest.

“We are now putting the entire company under a microscope,” Chief Executive Robert O’Leary told analysts on a conference call. “We are conducting an objective review of every business, every product and every market.”

Standard & Poor’s and Moody’s Investors Service put PacifiCare’s debt under review for possible downgrades, with both rating agencies citing liquidity concerns. S&P; has a “BB+” rating on the company, and Moody’s rates PacifiCare “Ba1.”

PacifiCare’s earnings warning surprised investors in part because the HMO industry has largely rebounded this year because of health plans’ ability to increase premiums and exit weak business lines.

Higher health-care costs will decrease PacifiCare’s third-quarter pretax earnings by $120 million to $130 million, the company said.

PacifiCare also blamed its fiscal troubles on the conversion of fixed-payment contracts with hospitals and doctors into shared-risk contracts. Under the fixed-rate contracts, PacifiCare paid health providers a set amount of money to care for its members. If the actual costs were higher, the providers would accept the financial risk.

With the shared-risk contracts, PacifiCare pays higher fees when health costs increase to care for its members.

Many physician groups and hospitals have shied away from the fixed-rate contracts because they either lost money from them or found them too risky.

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Associated Press and Bloomberg News were used in compiling this report.

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Steep Drop

Shares of PacifiCare Health Systems lost more than half their value after the company surprised Wall Street with a warning that it may post a loss for the third quarter.

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PacifiCare shares, weekly closes and latest on Nasdaq

Wednesday: $15.69, down $16.94

Source: Bloomberg News