PacifiCare Shares Plunge on Earnings Warning

Investors pummeled PacifiCare Health Systems Inc. on Wednesday, a day after the Santa Ana managed-health-care company warned that it may report an unexpected loss for the third quarter because of higher-than-expected costs.

The stock slumped 52% in heavy Nasdaq trading, although a large portion of the decline was sustained Tuesday in after-hours trading. PacifiCare shares fell $16.94 to $15.69 in trading of 5.6 million, more than 13 times the three-month daily average.

At one point in the session, the stock hit a 52-week low of $14.63. The shares, which traded as high as $72.31 about four months ago, have lost more than 70% of their value this year.

Standard & Poor’s and Moody’s Investors Service said they were putting PacifiCare’s debt securities under review for possible downgrades, with both rating agencies citing liquidity concerns.

S&P; has a “BB+” rating on the company, while Moody’s rates PacifiCare “Ba1.”

PacifiCare said Tuesday that its third-quarter results will range from a loss of 10 cents a share to break-even. Analysts were projecting earnings of $1.90 a share, according to a First Call/Thomson Financial survey.

The company also said its earnings per share for the year won’t meet its target.

“We are now putting the entire company under a microscope,” President and 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.”

PacifiCare has been hurt as it shifts away from a practice in which the company paid doctors and hospitals a fixed fee per patient, allowing them to keep any amount remaining after treatment costs.

The company and some hospitals have returned to a shared-risk system, in which costs for hospitalizations, outpatient treatment and other care are shared.

The shift led to a rise in the use of medical services, causing companies like PacifiCare to lose much of their control over costs, analysts said.

“PacifiCare was especially at risk because they were the biggest practitioner” of the fixed-fee system, said Sheryl Skolnick, analyst at Robertson Stephens.

PacifiCare said that higher costs in its employer and Medicare health plans will shave pretax earnings by $120 million to $130 million. Unanticipated costs resulting from an increase in inpatient treatment and outpatient surgery could run between $70 million and $75 million, the company said.

O’Leary said PacifiCare wouldn’t comment on financial projections until it releases third-quarter results, scheduled for Nov. 9.

Under the fixed-fee system, known as capitation, “the company had a very clear [idea] as to what its costs were going to be,” O’Leary said. “Once capitation was removed, we have not had a clear line of sight. We’re caught in a cycle that’s going to be a tough spot for the company” for months, he said.

At the end of August, 44% of PacifiCare’s hospitals were under shared-risk agreements, compared with 23% at the end of last year, the company said.

The company said its medical-cost ratio, the portion of each premium dollar that it pays in medical costs, will rise to 88 cents to 89 cents for its commercial business and to 91 cents to 92 cents for its Medicare business.

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Ailing Stock

PacifiCare Health Systems’ stock, which topped $72 a share in June, was pummeled after the Santa Ana company warned of an unexpected quarterly loss. Daily closing prices:

High of $72.31 (on June 16)

Wednesday’s close: $15.69

Source: Bloomberg News