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Higher Premiums May Cut PacifiCare Profit

Insurance: Medicare decision could cause the healthy to drop coverage. Rates in L.A., Orange counties won't be raised.

September 26, 2000|From Bloomberg News

PacifiCare Health Systems Inc., the nation's biggest operator of Medicare managed-care plans, could have lower profit next year if higher premiums chase away its healthiest customers, an analyst said Monday.

The Santa Ana company said on Sept. 15 that more than half of its 1 million Medicare members would have to pay monthly premiums of $19 to $99, beginning Jan. 1. Many of those customers pay no premiums now.

One analyst's reaction to the company's move helped drive the shares down 7.2% Monday.

If the premiums cause healthy people to drop coverage, the company could be left with a larger share of costlier sick customers next year, Lori Price, a Chase H&Q analyst, said in a report. Price also said more people who are ill and lack coverage might join PacifiCare plans in markets being abandoned by other Medicare health-maintenance organizations.

"There's concern about the long-term viability of Medicare HMOs," said Goldman, Sachs & Co. analyst Charles Boorady, who downgraded PacifiCare last week from "market outperform" to "market perform."

The firm's shares fell $3.13 to close at $40.06 on Nasdaq. PacifiCare's has fallen 25% since the announcement earlier this month.

While PacifiCare has struggled, HMO stocks in general have been red hot this year, as many have enjoyed rebounding profits amid rising health-care premiums.

PacifiCare hasn't revised next year's earnings estimates and won't comment until it releases third-quarter results later this week, said spokeswoman Suzanne Shirley.

"We have a new management team undergoing a strategic review of the company and we haven't said anything about 2001," she said. "We're still in the process of making decisions about the company's future."

Merrill Lynch & Co. analyst Roberta Goodman cut her 2000 full-year earnings estimate for PacifiCare from a range of $7.75 to $7.85 a share to a range of $7 to $7.40. She cut her estimate for next year to a range of $7 to $8 a share, from $9. Goodman cut her rating to near-term "neutral" from "accumulate."

PacifiCare announced earlier this year that it was dropping out of the Medicare business in several states, but is keeping its business in California. It has 600,000 California members in its Medicare plan, known as Secure Horizons.

But in order to remain in the Medicare business in California, the company is raising prices in several counties. Although rates in Los Angeles and Orange counties will remain largely unchanged.

Analysts expected PacifiCare to cut benefits rather than focus on premium increases, Boorady said.

Medicare HMOs are dropping nearly 1 million seniors next year because they say the cost of care is rising faster than reimbursements under the federal health-care program for the elderly.

PacifiCare said it will cut costs by $90 million through changes to benefits and coverage, including raising co-payments for doctor visits.


PacifiCare Slides...

Shares of PacifiCare Health Systems (ticker: PHSY) have slumped in recent weeks, and on Monday hit their lowest level since last October.

Weekly closes and latest for PacifiCare on Nasdaq

Monday: $40.06, down 3.13 (-7.2%)

... While Rivals Soar

Unlike PacifiCare, shares of many HMOs have surged this year, lifting the Morgan Stanley index of 12major HMOs to record highs.

Weekly closes and latest for Morgan Stanley HMO stock index

Monday: 349.06, down 2.64 (-0.7%)

Source: Bloomberg News

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