PacifiCare Shares Fall 22% as Profit Drops
Shares of PacifiCare Health Systems Inc. fell 22% on Thursday after profit at the biggest operator of Medicare health plans dropped 82% in the first quarter.
PacifiCare shares fell $8.29 to close at $29.10 in Nasdaq trading on volume of 5.7 million, or more than seven times the three-month daily average.
The Santa Ana-based company said after U.S. markets closed Wednesday that first-quarter net income fell to $13.1 million from $74.6 million a year earlier as medical costs rose. PacifiCare renegotiated contracts with doctors and hospitals that required the company to absorb more costs.
“Medical costs are the scary thing these days,” said Prudential Securities Inc. analyst David Shove, who has a “strong buy” on the shares. “Probably that’s got everybody spooked.”
Shove said PacifiCare’s medical-loss ratio rose more than he expected. The company said the ratio--the portion of every premium dollar that pays for medical care--rose to 90.2% in the quarter from 85.1% a year earlier. The ratio for employer plans rose to 89.5% from 82%.
PacifiCare led a drop in the Morgan Stanley Health Care Payor Index of 12 stocks, which fell 7.5%.
Other HMO stocks also were dragged down. Thousand Oaks-based WellPoint Health Networks fell $2.88 to close at $91.67. Woodland Hills-based Health Net lost 25 cents to close at $20.76. Philadelphia-based Cigna, which also said higher medical costs affected earnings, fell $3.05 to close at $89.80. All three trade on the New York Stock Exchange.
PacifiCare said it expects to earn 53 cents a share in the second quarter and $2.94 for the year.
“We don’t expect our turnaround to be a straight line up,” Chief Executive Howard Phanstiel told investors and analysts on a conference call. “There will be manageable bumps along the way.”
Phanstiel said that PacifiCare’s costs are typically higher in the first quarter, and that the company expects cost increases for medical care and prescription drugs to slow in the second half of the year. Costs have been highest in California, he said.
PacifiCare paid down some bank debt in the quarter and was conservative with its reserves even though its membership dropped to 3.7 million from 4 million a year ago, said CIBC World Markets Inc. analyst John Szabo, who has a “buy” rating on the shares.
“I’m OK with the stock,” he said. “But after what happened with Cigna, no one’s in the mood to do much analysis.”
PacifiCare has been struggling to boost financial results as it makes a big shift in the way it pays doctors and hospitals. Under its new strategy, the company has switched from a traditional managed-care tool known as a capitated--or fixed-payment--system to a shared-risk arrangement.
Costs were more predictable under the old system because medical costs were predetermined. The new system has resulted in a huge increase in the company’s claims volume, for which it was not prepared.
PacifiCare could gain 25 cents a share in profit next year from a contract with the California Public Employees’ Retirement System, Lehman Bros. Inc. analyst Lawrence Marsh said.
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Cost Woes Dog an HMO
Shares of managed-care company PacifiCare were slammed Thursday after the firm said quarterly earnings plunged amid rising medical costs. The same problem crushed the shares last year, but the stock rebounded early this year as the company predicted an earnings recovery.
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PacifiCare (PHSY) weekly closes and latest on Nasdaq:
Thursday: $29.10, down $8.29
Source: Bloomberg News
