Pacificare stock is decimated on earnings warning

Wednesday, Oct. 11, 2000 | 11:28 a.m.

SUN STAFF AND WIRE SERVICES

Shares of PacifiCare Health Systems Inc., one of the nation's largest managed care companies, plunged 52 percent today after it said higher medical costs will cause its financial performance to fall well short of Wall Street expectations.

The Santa Ana, Calif.-based company said late Tuesday it expects to break even or lose up to 10 cents a share for the third quarter. Analysts expected PacifiCare to make $1.90 a share, according to a survey by First Call/Thomson Financial.

Investors weren't pleased, sending shares of PacifiCare down $17 to $15.63 in trading on the Nasdaq Stock Market.

PacifiCare said its earnings for the rest of the year will not meet previous estimates. The company blamed the higher costs on more members going to hospitals than last year and said it will put more money in its reserve to cover the increased claims.

Kayla Arnesen, Pacificare of Nevada's director of public affairs, said the company remains financially stable.

"We do, however, face the same market challenges as the rest of the company," she said. "We have seen providers move away from 'capitation' in our state. Instead of reimbursing our providers a flat fee to provide health care services to our members, we are moving back to other reimbursement arrangements."

"As a result, the health plans and providers now share a greater cost in providing health care services, and higher health care costs have potential to affect the health plan's financial position," she said.

"We are also faced with the financial challenges affecting Secure Horizons, (an HMO that offers healthcare services to Medicare-eligible people in Nevada) that resulted from the Balanced Budget Amendment Act in 1997, which essentially reduced government funding and reimbursements to Medicare HMOs," Arnesen said.

"To date, PacifiCare of Nevada has been able to meet these challenges by developing new contracting arrangements and designing benefit plans that allow us to remain competitive with our Secure Horizons and commercial products," she said.

PacifiCare also said it will not accept new members in a Medicare program until it completes a review of its business to try to contain costs. But Arnesen said the company will continue to enroll Secure Horizons members in Nevada.

Arnesen said Pacificare has 63,000 customers in Nevada and 80 workers in Las Vegas.

"We don't expect the earnings announcement to affect the employee base in Nevada. And we expect to continue providing members with ... uninterrupted service."

PacifiCare is the nation's largest Medicare HMO with nearly 1 million members. Overall, PacifiCare has about 3.7 million members. The company serves nine states, primarily on the West Coast and in the Southwest.

PacifiCare's earnings warning stunned investors, in part because the HMO industry has largely rebounded this year due to health plans' ability to increase premiums and exit weak business lines.

Higher health care costs will decrease PacifiCare's third quarter pretax earnings by $120-$130 million, the company said.

PacifiCare also blamed its fiscal troubles on the conversion of the capitated, or fixed payment contracts, with hospitals and doctors into shared risk contracts. Under the fixed rate contracts, PacifiCare paid health providers a set amount of money to care for its members. If the actual costs were higher, the providers would accept the financial risk.

With the shared-risk contracts, PacifiCare pays higher fees when health costs increase to care for its members.

Many physician groups and hospitals have shied away from the fixed-rate contracts because they either lost money from them or found them too risky.