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PacifiCare Will Pay More for Medical Costs

Health care: The Santa Ana HMO's plan to boost coverage is met with skepticism, even though earnings beat forecasts.

August 04, 2000|SHARON BERNSTEIN | TIMES STAFF WRITER

A decision by PacifiCare Health Systems Inc. to pay doctors and hospitals more to cover the cost of patient care has pleased health-care providers, but it hasn't made the company popular on Wall Street.

On Thursday, shares in the Santa Ana-based company dropped 14.3% on the Nasdaq Stock Market, falling $9.63 to close at $57.56, after at least one analyst cut the stock's rating.

By comparison, shares of UnitedHealth Group, which has consistently reduced the amount of financial risk it takes on as an insurer, rose $1.31 to close at $84.94 on the New York Stock Exchange, as United reported a 26% increase in second-quarter net income. Shares of most other health maintenance organizations also rose Thursday, with the major exception of Humana Inc., which fell 3% after reporting a 47% drop in quarterly earnings.

PacifiCare late Wednesday posted a 2.7% rise in profit that beat projections for the second quarter, although part of the increase in per-share earnings reflected a stock buyback.

PacifiCare is "entering a period where we're going to see higher volatility on medical costs," said health-care analyst John Rex, of Bear Stearns in New York, who downgraded the stock to a "neutral" rating on Thursday.

Strategically, Rex said, PacifiCare is doing the right thing by backing off from its model of forcing hospitals and doctors to pay for all aspects of patient care out of a fixed monthly fee. Such a policy--once rewarded by Wall Street as a way to provide health coverage without taking on a lot of financial risk--is now blamed for the financial strains besetting doctors and hospitals, and for causing uncertainty for risk-averse investors.

But the change caused the company to pay about a penny more of each premium dollar for medical care. And that amount is likely to rise even more by year's end, Rex said.

Robert O'Leary, who took over as PacifiCare president last month, said Thursday he believes that the company will show Wall Street over the next two quarters that it can manage the new system well, and make money at it.

"We have to prove to Wall Street that we can do it," said O'Leary, a long-time hospital-industry executive who made the jump to managed care. "We are going to have to demonstrate to the Street over time that we can effectively manage not only our transition, but the additional [financial] model as well."

But analyst Todd Richter, of Banc of America Securities in New York, said PacifiCare's troubles with investors are more complicated.

For one thing, he said, although the company has significantly reduced the number of patients whose hospital care must be paid for entirely by providers--from more than 80% to about 60%--most are still covered under the fixed-fee arrangement. And the company has reduced the number of patients whose doctors are on such arrangements from 96% to 90% since the beginning of the year.

That, said Richter, means that the company continues to rely heavily on the old system--known in industry jargon as capitation--and is paying the price for that reliance, even as it pays for being in a transition.

Investors, Richter said, do not believe that capitation works in the long run--even when the company shares some risk with some providers.

PacifiCare is also suffering from investor skittishness about a new management team, and from the continuing perception that it is too heavily invested in the federal Medicare program.

Other HMOs have steadily quit Medicare--dropping nearly 1 million seniors just this year. They cite low federal reimbursements, saying that the government does not pay enough to cover the cost of providing comprehensive care for seniors.

But PacifiCare, while itself dropping tens of thousands of seniors over the last two years, has steadfastly remained in the program in many areas, including California.

Company officials have maintained that the federal government will soon offer relief to health plans in the form of increased payments.

But Sheryl Skolnick, a health-care analyst at Banc Boston Robertson Stephens, said it is unlikely in an election year that Congress or the Clinton administration will be willing to be viewed as offering money to managed-care companies.

"Everybody loves to hate HMOs," she said. "To think anything substantial will come out that can be viewed as favorable to HMOs in advance of the election is naive."

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Bad Fall

PacifiCare Health Systems' stock hit the skids Thursday, slumping $9.63 after being downgraded by at least one analyst. Daily prices:

Thursday's close: $57.56

Source: Bloomberg News

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