PacifiCare stock falls on legal troubles

Monday, Feb. 18, 2002 | 10:38 a.m.

SUN STAFF AND WIRE REPORTS

SANTA ANA, Calif. -- PacifiCare Health Systems Inc. reported a fourth-quarter loss because the biggest operator of Medicare health plans had restructuring expenses and battled rising health-care costs.

PacifiCare lost $26.4 million, or 77 cents a share, compared with net income of $12 million, or 35 cents, a year earlier, the company said last week. Revenue fell 3.3 percent to $2.88 billion from $2.97 billion.

Wednesday's earnings report and PacifiCare's legal troubles in Texas prompted a 7 percent drop in the insurer's stock price Thursday to $16.80. The stock fell another 98 cents to close at $15.82 Friday.

The company -- a big insurer in Nevada -- last month said it was cutting 1,300 jobs, or 15 percent of its workforce, to reduce costs as it struggled to meet rising medical costs. The job cuts added $59.4 million to fourth-quarter expenses as part of a restructuring that the company said will save $80 million to $90 million a year. PacifiCare also is offering new health plans that will make it less dependent on Medicare.

"We intend to differentiate ourselves and bet the future of the company on our ability to provide quality care for our members," Chief Executive Officer Howard Phanstiel told reporters on a conference call.

PacifiCare said profit would have been $11.8 million, or 34 cents a share, without the restructuring expense. On that basis, the insurer was expected to earn 36 cents, the average estimate of analysts surveyed by Thomson Financial/First Call. Individual profit forecasts ranged from 29 cents to 43 cents.

The company expects to earn $3.55 to $3.65 a share in 2002.

PacifiCare paid 89.5 cents of every premium dollar for medical care in the quarter, up from 89.3 cents a year earlier. Medical costs in the government-contracted Medicare plans ate 91.3 cents of every premium dollar, up from 89 cents in the third quarter, as patients scheduled elective surgery before PacifiCare increased required co-payments for hospital care on Jan. 1, Phanstiel said. PacifiCare has had trouble controlling medical costs in California after renegotiating contracts to pay doctors and hospitals based on the cost of care rather than fixed monthly amounts.

PacifiCare, which had about 372,000 customers in Texas as of Sept. 30, said expenses related to insolvent medical groups in that state hurt results in the fourth quarter, though the company wasn't specific.

Last week, the Texas attorney general's office sued PacifiCare of Texas Inc. for not paying "tens of millions of dollars" in back claims for three physician groups in its network that recently filed for bankruptcy. That sent shares down 11 percent on Monday. PacifiCare denied any wrongdoing and said it will fight the lawsuit. Phanstiel said the company already has paid more than $43 million in disputed claims.

The company, which faces fines of $1,000 a day for every unpaid claim, failed to disclose that Texas officials demanded documents in the case in September or that PacifiCare had filed a countersuit in November, according to Fulcrum Global Partners LLC analyst Sheryl Skolnick. "The company commits the sin of omission on numerous occasions and investors still buy the stock," wrote Skolnick, who has a "sell" rating on PacifiCare. "Pardon our outrage, but we fail to understand how anyone managing anyone else's money can purchase these shares."

Phanstiel said the company had no obligation to disclose Texas's demand for documents or its own lawsuit because those matters weren't material.

The insurer also must cut its bank debt by March 31 or pay a higher interest rate under terms of $800 million in bank loans PacifiCare arranged last year. The bank deal came after PacifiCare couldn't raise $1 billion in debt through a combination of junk bonds and loans.

In December, the company sought to cut its bank debt by agreeing to sell up to 6.9 million shares to Acqua Wellington Asset Management, a Bahamas-registered hedge fund that is the largest issuer of equity lines of credit. Critics say such financing attracts short selling, which can drive down a company's stock price. In short selling, an investor borrows stock and sells it in a bet that the shares will decline, allowing him to repurchase stock at a cheaper price.