Shares of Santa Ana-based PacifiCare Health Systems Inc. slumped Thursday as analysts questioned the company's first-quarter financial performance, as well as raising concerns about rising medical costs.
The stock fell $8.29 a share, or 22.2%, to $29.10 in Nasdaq trading, making PacifiCare one of the biggest percentage losers in U.S. markets. A total of 5.7 million shares changed hands, more than seven times average daily volume for the last three months.
PacifiCare reported an 82% drop in first-quarter profits Wednesday after the close of trading, although per-share earnings exceeded Wall Street's expectations.
Net income fell to $13.1 million, or 39 cents a share from $74.6 million, or $2.04 share a year earlier, as costs continued to rise because of changes in how the company pays doctors and hospitals. Revenue rose 7.2% to $3.03 billion.
Analysts had projected profits of 34 cents a share, according to First Call/Thomson Financial.
PacifiCare's financial performance included an array of non-earnings items.
Earnings benefited from several adjustments that kept earnings per share from being lower, said analyst Joe France of Credit Suisse First Boston Corp. Also, reserves fell, as did costs for marketing and administration, which should be on the rise as PacifiCare shifts to contracts that base payments on the cost of care rather than fixed fees. But that has left the company to absorb more medical costs, which in turn has ravaged its once-strong financial performance.
PacifiCare is committed to a two-year turnaround plan that involves exiting unprofitable markets, hiking premiums to stay ahead of rising medical costs and boosting its offerings of preferred provider organizations, or PPOs, which allow members more choice of physicians than the strict HMOs that PacifiCare helped to pioneer.
First-quarter medical costs rose more than some analysts expected and ate up a larger portion of the company's revenue. That may have proven unnerving to some investors, since the portion of revenue used to pay medical costs, also known as medical cost ratios, will have to improve significantly in the second half of the year if PacifiCare is to meet management's year-end estimates of $2.94 a share, analysts said.
Analysts are estimating profits of $2.34 a share for the year, according to First Call.
PacifiCare chief executive Howard Phanstiel acknowledged that the turnaround isn't expected to be "a straight line up. There will be manageable bumps along the way."
Phanstiel said PacifiCare's costs are typically higher in the first quarter, and the company expects cost increases for medical care and prescription drugs to slow in the second half of the year. Costs have been highest in California, he said.
Combined medical costs ate up about 90.2% of PacifiCare's first-quarter revenue, up from 85.1% last year.
The medical loss ratio in the Medicare business rose to 90.7%, compared with 87.4% last year. "Medical cost ratios are not showing signs of improvement yet," Rex said. "I think that will continue to shake some confidence."
Bloomberg News was used in compiling this report.