PacifiCare CEO Resigns After Just 3 Months
More turmoil rocked the nation’s largest Medicare HMO on Wednesday as Chief Executive Robert O’Leary resigned after just three months on the job.
The move came two weeks after PacifiCare Health Systems of Santa Ana said it might lose money in the third quarter, an announcement that sent its already beleaguered stock down to record lows.
On Wednesday, the stock plunged another 13%, closing down $1.56 at $10.44 on the New York Stock Exchange.
“I basically got to this point and found out that the challenges in front of the company are very, very different than what they were believed to be back in the spring when I was hired,” O’Leary said.
O’Leary has been replaced temporarily with Chief Financial Officer Howard Phanstiel, who was personally recommended by O’Leary and is himself a newcomer to PacifiCare, having joined the company in July.
With a background in running medical groups and hospitals, not managed care or insurance companies, O’Leary took the job at PacifiCare with the assumption that the company needed a leader who understood health care and could strategically position the organization to take advantage of changes in the marketplace. He replaced former CEO Alan Hoops after a five-month search.
Instead, he found that he had joined the company at a time when it was being forced to change its underlying business model--from one that had fixed monthly costs to one that functioned much like an old-fashioned insurance company, with financial risks that changed from month to month depending on how many times patients go to the doctor or use prescription drugs.
For that reason, O’Leary, other top company executives and outside analysts said, PacifiCare needed a CEO with a strong understanding of finance, managed care and, perhaps most of all, traditional insurance models. PacifiCare has 4 million members.
“Instead of a strategic, long-term play, this is really fundamental managed-care stuff,” O’Leary said. “I honestly had to say to myself, ‘This is not where my skills are.’ ”
Neither the appointment of Phanstiel nor O’Leary’s decision to step down does anything to address the financial and structural problems racking the managed-care giant, said Todd Richter, a health-care analyst with Banc of America Securities in New York.
“Rob O’Leary joined this company thinking it needed some strategic direction and some reinvigoration toward growth,” Richter said. But “the financial situation is worse than he or anybody else could have imagined, and he does not have a financial background. . . . This is a company that is not going to be in growth mode for a while.”
The situation came to a head because PacifiCare, more than other health maintenance organizations, had clung to a system of paying doctors and hospitals called fixed fees, known in the industry as capitation, in which a health plan pays a set monthly fee no matter what the actual costs of caring for patients.
This pushed the financial risk onto providers, but now most refuse to be strictly bound to such a fixed-fee system. So PacifiCare’s costs have been going up. At the same time, PacifiCare, which cares for 1.1 million seniors in its Secure Horizons HMO, has been buffeted by financial turmoil in the Medicare market, which many believe is underfunded by the federal government.
Phanstiel, who has a background in finance and insurance, said he hopes to “show signs of progress” in the company’s finances in about a year. But he estimated that it would be at least two years before any turnaround would be complete.
For the short term, Phanstiel said he plans to focus on stabilizing the company and making a smooth transition to the new business model, which requires paying doctors and hospitals for each procedure they perform, instead of the set monthly fee.
“Our focus is on improving short-term control and profitability,” he said.
While others have speculated that PacifiCare will need to hire people who are experts in what’s called the fee-for-service insurance model, while trimming jobs elsewhere, Phanstiel would not say which options he was weighing.
He also would not comment on whether the company would now move away from the Medicare business, which provides most of its revenue but is roundly disliked on Wall Street. PacifiCare is the biggest Medicare HMO operator.
But, he said, such details would likely be disclosed next month, when the company releases its results for the third quarter.
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Stock Crash
PacifiCare has seen its stock lose 68% of its value since Oct. 10, when it warned of third-quarter losses. Shares traded as high as $72.31 on June 16.
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PacifiCare shares, monthly closes and latest on the NYSE
Wednesday: $10.44, down $1.56
Source: Bloomberg News
