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PacifiCare Profits Soar in Quarter

Earnings: Santa Ana-based firm left unprofitable markets, experienced growth despite cut in payments for Medicare patients.

February 24, 1999|From Bloomberg News

PacifiCare Health Systems Inc., the No. 1 operator of Medicare health-maintenance organizations, said fourth-quarter operating profit more than tripled as it left some markets and cut costs.

Profit from operations rose to $55 million, or $1.18 a share, from $15 million, or 30 cents a share, a year earlier. Results were in line with the $1.17 average estimate of analysts polled by First Call Corp.

Santa Ana-based PacifiCare was able to keep earnings growing last year even as the government cut growth in payments to operators of HMOs for patients on Medicare, the government's health insurance program for the elderly. That's partly because the bulk of PacifiCare's patients are cared for by physicians who share some costs of patient care in exchange for fixed monthly payments.

"These guys are very experienced Medicare players. They do understand the business," said John Rex, a BancBoston Robertson Stephens analyst with a "long-term attractive" recommendation on PacifiCare.

The company's stock climbed $4.38 a share, or 6.3%, to $73.69 on volume of 1.18 million on the Nasdaq market, more than four times the daily average over the last three months.

In the quarter ended Dec. 31, the company took a one-time gain of $4 million, or 10 cents a share, for an expected payment from the government to cover higher-than-expected medical costs for insuring government employees. That made net income of $59 million, or $1.28 a share. Revenue dropped slightly to $2.34 billion from $2.36 billion.

In the year-earlier period, charges of $129 million resulted in a loss of about $114 million, or $2.78 a share. Most of the charges related to its troubled 1997 acquisition of health insurer FHP International Inc. After PacifiCare agreed to buy the insurer, it discovered that FHP had failed to raise premiums in line with growing medical costs, especially in Utah. It responded by exiting the Utah market.

"The problems associated with FHP are now behind PacifiCare," said Greg Crawford, a Fox-Pitt Kelton analyst with an "attractive" recommendation on the stock.

Membership fell 7% to 3.53 million from 3.79 million a year earlier. The company, which markets its Medicare HMOs under the Secure Horizons brand, attributed the decline to its departure from unprofitable markets.

As the company stopped offering Medicare HMOs in unprofitable markets in Utah, Arizona, Washington, Texas and California, its Medicare membership fell to 972,800 at the end of December, from 989,700 a year earlier.

Growth in profitable Medicare markets picked up in January, when the company signed up 12,800 Secure Horizons members.

The company said health care costs accounted for 85.1 cents of every dollar of premium revenue, a decline from 85.8 cents a year earlier and an increase from 84.7 cents in the third quarter of 1998.

For the year, the company posted a profit of $202.4 million, or $4.40 a share, compared with a loss of $21.7 million, or 75 cents a share, in 1997. Revenue climbed 6% to $9.5 billion from $9 billion.

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