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Stock Sinks 35% After Firm Loses U.S. Contract : Health: A unit of Aetna will take over from Foundation Health Corp. The Pentagon contract is for care to military retirees in California and Hawaii.


Foundation Health Corp.'s stock plummeted 35% on Thursday following its loss of a five-year, multibillion-dollar Pentagon health care services contract that accounted for more than 45% of the Sacramento-area company's revenue for the fiscal year ended June 30.

A San Diego-based unit of Aetna Life & Casualty Co. on Wednesday was awarded a $3.5-billion Pentagon contract to provide medical care for 840,000 military retirees and their dependents in California and Hawaii.

Foundation Health had handled the plum Pentagon contract since 1988 and in fiscal 1993 derived just under $700 million of its total $1.5 million in revenue from the contract--as well as a large share of its operating profit, the company said.

Wall Street pummeled Foundation Health's shares, which fell $11.25 to $20.75 in New York Stock Exchange trading. Several analysts quickly slashed their earnings forecasts for the company, a provider of managed health care services for government and industry.

Aetna's stock closed at $60, up $2.25, on the Big Board.

The contract loss will force Foundation Health "to look at overhead expenses relative to our business" said Kurt D. Davis, investor relations director. By contrast, Aetna will nearly double its employment, from 220 to 450 people, throughout California in the next several months, a company spokeswoman said.

The five-year contract award to Aetna Government Health Plan came after a two-year battle between incumbent Foundation Health, Aetna and several other bidders. Under the prior contract, Aetna was the biggest subcontractor, providing service to about 430,000 military retirees and dependents in Southern California.

"We taught Aetna how do it," Davis said. "They used all our technology and equipment, and they learned enough to make a good bid."

Foundation Health said it may lodge a protest with the Defense Department's Civilian Health and Military Program of the Uniformed Services office. Known as Champus, the government program aims to control health care costs by encouraging beneficiaries to join managed care and preferred-provider organizations.

Daniel D. Crowley, Foundation Health's president and chief executive, said the company has been trying to diversify its business beyond the Champus contract for more than three years "to reduce the potential impact of unexpected events like this." He said those efforts should offset some of the earnings impact of the contract loss.

Eleanor Kerns, an analyst at Alex. Brown & Sons in Boston, said that although Foundation has "taken great pains" to broaden its business, it remains overly dependent on the Champus contract and on the "difficult" California market generally.

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