PacifiCare Profit Falls 82% as Medical Costs Rise
PacifiCare Health Systems Inc., the biggest U.S. operator of Medicare health plans, said Wednesday that first-quarter profit fell 82% as medical costs rose after it renegotiated contracts with doctors and hospitals.
The financial results still exceeded analysts’ expectations.
Net income fell to $13.1 million, or 39 cents a share, from $74.6 million, or $2.04, a year earlier. Revenue rose 7.2% to $3.03 billion, while health-care costs jumped 13% to $2.7 billion.
Analysts had estimated earnings of 34 cents a share, according to a survey by First Call/Thomson Financial.
The results were announced after U.S. markets closed. PacifiCare shares rose as high as $40 in after-hours trading after closing at $37.39, down 7 cents on Nasdaq.
The Santa Ana-based company, under pressure from health-care providers, is shifting to contracts that base payments on the cost of care rather than on fixed fees. That has left the company responsible for absorbing more medical costs.
PacifiCare is leaving unprofitable markets, increasing premiums for its health maintenance organizations and trying to control costs.
“They have a credible plan of action in place, but it’ll be difficult,” said Lehman Bros. Inc. analyst Josh Raskin, who has a “buy” rating on the shares. “They’re going to have put a few quarters under their belt before the Street gives them credit.”
PacifiCare said costs rose for employer health plans and for Medicare health plans. The company’s medical loss ratio--the portion of every premium dollar that pays for medical care--rose to 90.2% from 85.1% a year earlier. The ratio for Medicare plans rose to 90.7% from 87.4%.
Payments rose March 1 for Medicare, the government health insurance program for the elderly and disabled. PacifiCare has said $179 million in additional Medicare revenue will add $40 million to $50 million to earnings this year.
The company also expects medical costs to stabilize because fewer contracts with doctors are being shifted this year from fixed payments to fee-for-service arrangements.
Chief Executive Howard Phanstiel said the company may ask hospitals to change contracts that were negotiated quickly last year as it sets up a new preferred provider organization and adjusts co-payments for people covered by employer health plans.
“In some selected cases, we need to revisit those contracts to make sure they’re market competitive,” he told reporters on a conference call.
Phanstiel said the company anticipates premium increases for employer-plan contracts that are up for renewal this year.
He also said the company has cut its backlog of claims by 59% in Texas and by 28% in California, states where regulators stepped in when claims went unpaid.
The company has forecast earnings of $2.94 a share this year and earnings growth of 15% to 20% in 2002 as it relies less on its Medicare business. Analysts expect 2001 earnings of $2.34, according to First Call/Thomson Financial.
In other Southern California company earnings news, Guitar Center Inc., the Agoura Hills-based musical instrument retail chain, reported a 20% rise in first-quarter net income to $5 million, or 22 cents a share, compared with $4.1 million, or 19 cents, a year ago. Sales rose 21% to $213.2 million. Same-store sales rose 7%.
