PacifiCare Cuts 2001 Profit Forecast

Managed health-care company PacifiCare Health Systems Inc. said Wednesday that its earnings this year probably will fall as much as 43% below the company’s prior estimate because of higher medical costs in its California operations.

The Santa Ana-based company, which operates the nation’s largest Medicare health maintenance organization, said it expects to earn $56 million to $59 million this year, instead of the $99 million previously anticipated.

That translates into $1.65 to $1.75 a share, far lower than the $2.94 a share it had hoped to earn this year.

Nasdaq trading in PacifiCare shares was halted just before the market closed so the company could issue its warning. The shares lost 51 cents to close at $18.50. But in after-hours trading, the shares dropped as low as $15.

The expected earnings shortfall is linked to higher costs in the company’s California commercial health plan operations, said Howard Phanstiel, PacifiCare’s president and chief executive.

“We are taking a number of actions to address the situation in California,� Phanstiel said.

The measures include “strengthening operations, securing adequate premium increases for the commercial business yet to be renewed this year and continuing this activity into 2002, and focusing on enrollment in our disease management programs, which is proceeding ahead of plan so far this year,� he said.

Phanstiel said other efforts, as well as new hospital contracts, are expected to yield results in the latter part of the year.

PacifiCare, which has posted sluggish earnings growth as it seeks to restructure to get a grip on high medical costs, also said it expects earnings per share for the second quarter to be comparable to the first quarter. The company posted first-quarter earnings of 39 cents a share.

Analysts on average had expected the company to earn 53 cents in its second quarter, and $2.45 a share for the full year, according to First Call/Thomson Financial, which tracks earnings data.

Wall Street’s recent quarterly and annual earnings estimates have varied greatly. For this year, analysts’ projections range from a loss of 4 cents to a profit of $3 a share. For the second quarter, they expect anywhere from a loss of 38 cents to a profit of 73 cents a share.

Under its new business strategy, PacifiCare is switching the way it pays doctors and hospitals from a fixed-fee system, which pays a set monthly amount per patient regardless of medical costs, to shared-risk arrangements.

“Although our overall turnaround is progressing, the cost pressures we face under new risk-based agreements appear to be more troublesome in California than elsewhere and will take somewhat longer to get under control,� Phanstiel said.

He said the company experienced the most significant shift from fixed-fee to risk-based arrangements in the California market last year.

The company said that its other businesses, including specialty companies, are meeting expectations for the year and that cash flow remains strong.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

No Recovery Yet

PacifiCare Health Systems continues to see fallout from its decision last year to change the way it pays health providers for patient care. Wall Street generally has backed the restructuring plan, but the company has had difficulty predicting the rate of medical cost increases, delaying its turnaround. Its stock has lost about 72% since hitting a 52-week high of $68.38 last June.

*

PacifiCare shares, weekly closes and latest on Nasdaq

Wednesday: $18.50 down 51 cents

Source: Bloomberg News