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PacifiCare Ends Loss With Cost Cuts, Premium Hikes

In a turnaround, the Medicare HMO giant posts net income of $70.8 million.

May 01, 2003|Ronald D. White | Times Staff Writer

PacifiCare Health Systems Inc. swung to a profit in the first quarter by cutting costs, trimming the number of members in its relatively low-margin HMO plans and boosting the insurance premiums it charges employers by 18%.

The Cypress-based company, one of the nation's largest Medicare health maintenance organizations, said Wednesday that profit in the quarter was $70.8 million, or $1.91 a share, contrasted with a loss of $858.8 million, or $24.86, in the year-earlier period. In last year's first quarter, PacifiCare's results included a $25.96-a-share write-down in goodwill for acquisitions because of accounting changes.

With an unusually large percentage of seniors in Medicare HMO plans, the company is exiting unprofitable markets where it works with the government to offer Medicare coverage. PacifiCare says Medicare doesn't pay enough to cover an increase in medical costs.

In part because of the strategy, the number of seniors in its HMO plans was 128,800 lower at the end of the first quarter than in the year-earlier quarter. Overall, membership in its HMOs fell by 212,000 in the quarter.

"They are trying to focus on the growth of their non-Medicare business and they are becoming more of a full-service health care company," said William McKeever, an analyst at UBS Warburg.

Enrollment in PacifiCare's more lucrative preferred provider and indemnity insurance plans nearly doubled in the quarter to 99,700 members. And the company expects to double that number in the next year, McKeever said.

"Our first-quarter results significantly exceeded expectations," said PacifiCare Chief Executive Howard Phanstiel. "We have focused on carefully managing the Medicare programs in the face of lagging government reimbursement."

The company benefited in the latest quarter because it didn't owe as much for medical claims in the fourth quarter as it had set aside in a reserve.

First-quarter revenue fell 4% to $2.74 billion, from $2.86 billion a year earlier, because of a decline in enrollment.

Two weeks ago, PacifiCare said it expected full-year profit to be from $6 to $6.10 a share; it had forecast profit of $4.25 to $4.35.

Phanstiel was rewarded with a $1.69-million bonus last year, compared with $360,000 a year earlier, according to a government filing.

Phanstiel will convert $676,000 of his bonus, or 40%, into PacifiCare's common stock, the company said. On March 1, PacifiCare increased his salary to $990,00 from about $900,000 in 2001 and 2002.

PacifiCare also said that it would begin expensing stock options this year to "further enhance the transparency of our financial performance for investors," Phanstiel said on a conference call.

The company announced its earnings after the stock market closed. PacifiCare's stock closed at $31.77 a share, up 43 cents, on Nasdaq. Shares rose to $32.78 in after-hours trading. PacifiCare's stock has climbed 13% this year.

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Bloomberg News was used in compiling this report.

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