PacifiCare Profits Dip 82%; Earnings’ Update Is Upbeat

From Bloomberg News

PacifiCare Health Systems Inc., the biggest U.S. operator of Medicare health plans, said Tuesday that fourth-quarter profit fell 82%, largely the result of rising medical costs and a restructuring charge.

The Santa Ana company also said earnings this year should exceed expectations, triggering a 21% increase in the stock in after-hours trading.

Net income for the three months fell to $12 million, or 35 cents a share, from $66.4 million, or $1.59 a share, a year earlier, PacifiCare said after U.S. markets closed. Revenue rose 15% to $2.9 billion.


PacifiCare has faced higher medical costs for customers covered by employer health policies and by its Medicare health plans. Doctors also are demanding that new contracts pay them for the actual cost of care rather than fixed fees for patients.

“Given those two issues, I think the company still has a tough year ahead,” ABN Amro Inc. analyst Peter Costa said before the earnings were released. He rates the stock a “hold.”

PacifiCare said it expects to earn $2.90 to $2.95 a share this year, and predicted its earnings per share will grow 15% to 20% in 2002 and beyond.

Estimates of analysts surveyed by First Call/Thomson Financial had ranged from a loss of $2.18 a share to a profit of $2.30. The average estimate was 87 cents.

The company had been expected to earn 20 cents a share in the fourth quarter.

For the year, PacifiCare’s net income fell 42% to $161 million, or $4.58 a share, from $278.5 million, or $6.23 a share, in 1999. Revenue increased nearly 15% to $11.47 billion.

In regular trading, PacifiCare’s stock fell 75 cents to $24.75 a share on Nasdaq. The shares have lost about 45% of their value in the past 12 months.


PacifiCare said first-quarter profit should be about 35 cents a share and will increase in the final three quarters because of higher premiums and greater Medicare reimbursements that take effect March 1.

The company said it had about 4 million customers as of Dec. 31, a 9.6% increase from 1999. About 1 million of those customers are in Medicare health-maintenance organizations.

PacifiCare said it cut its full-time work force by 6%, reduced marketing costs after capping enrollment in 42 of the 101 counties where its Medicare HMOs operate, and exited employer-health-plan markets in Colorado and Texas.

It also raised premiums by 7% from a year earlier, the company said.

Chief Executive Howard Phanstiel said the cost cuts and premium increases are part of an effort to make PacifiCare less dependent on Medicare. He said the company could leave the government health-insurance program for the elderly after this year if funding isn’t increased.

The company this year will expand its preferred-provider organizations, offer a women’s-health network, low-cost insurance plans and Medicare supplemental insurance, Phanstiel said.

PacifiCare also plans to expand mail-order prescription-drug distribution through a unit that manages pharmacy benefits for customers and help its physician network participate in drug trials. Its goal is to be one of the top five U.S. pharmaceutical companies in five years, Phanstiel said.


Even if it stays in Medicare, “This other revenue is all gravy,” he said.

In the quarter, PacifiCare took a pretax charge of $14.6 million, or 24 cents, for 550 job cuts and had a gain of $4.4 million, for a contract buyout. The company didn’t provide full details of its results.

PacifiCare said Dec. 13 that the job cuts were necessary to cut costs. Most of the cuts were in sales and marketing, particularly for PacifiCare’s Medicare health-maintenance organizations.

The company will get higher payments from Medicare this year as part of federal legislation that raised Medicare and Medicaid funding by $35 billion over five years.

“It helps them, but I think it’s only a modest positive,” analyst Costa said of the payment increase. “Medicare continues to be a difficult business.”

The company has struggled to control medical costs for Medicare customers as prescription-drug prices increase.