PacifiCare Reports Strong Earnings

PacifiCare Health Systems Inc., which just a year ago was in the hot seat with investors and health providers, is beginning to make good on its promised turnaround.

The nation’s largest supplier of Medicare health plans reported Wednesday that its third-quarter profit more than doubled, to $43.8 million, as the Cypress-based company benefited from higher premiums and jettisoning money-losing members.

The unexpectedly strong results, announced after the close of markets, sent PacifiCare’s stock soaring to $28.76 in after-hours trading. Shares were up $1.30 to $24.42 in regular Nasdaq trading.

“This quarter shows that the company is making progress in the short-term issues,” said health-care analyst Greg Crawford, referring to problems PacifiCare has had with pricing its premiums correctly and its methods for paying hospitals and doctors.

Like others in the managed-care industry, PacifiCare is generating strong earnings because premium increases are outpacing costs for medical care. But Crawford, who is with the brokerage Fox-Pitt, Kelton, said PacifiCare’s longer-term challenge is significant.

Unlike most other health plans, PacifiCare has unusually large involvement in the Medicare market. As Medicare payments have failed to keep up with medical cost inflation, PacifiCare has been getting out of some geographic markets, reducing benefits and increasing Medicare HMO premiums. At the end of the third quarter, the company’s senior membership was down 21% from a year ago, to 795,000.

Even so, Medicare accounted for almost 54% of PacifiCare’s premium revenue of $2.8 billion in the third quarter, Crawford said. “That makes them very dependent on a government program that has an uncertain future,” he said.

PacifiCare’s management is trying to address this by building its commercial HMO membership and specialty lines such as Medicare supplemental coverage. The company also will continue to prune its Medicare enrollment. Next year, it plans to pull out of more areas, which will reduce membership by 37,000.

Howard Phanstiel, PacifiCare’s chief executive, said Wednesday that he will not reduce Medicare HMO benefits as sharply next year, noting that the company is prepared to make a smaller profit to maintain as large a senior membership as possible.

In a conference call with reporters, Phanstiel said he expected commercial enrollment to grow next year, although it fell 8% over the last year and will start next year lower because of the loss of the California Public Employees’ Retirement System account.

Higher premiums still enabled the company to sharply cut its medical-loss ratio, which measures the portion of revenue to pay for medical services, to 85.8% from 89.2% a year earlier.

The company’s third-quarter earnings of $1.20 a share compared with 93 cents a year earlier, after adjusting for a change in accounting standards related to goodwill. Total revenue in the quarter dropped 6% to $2.8 billion.

Phanstiel said the third-quarter results “clearly surpassed even our own expectations.”

PacifiCare officials Wednesday boosted their full-year estimate, to $3.90 a share, from $3.40 previously, but said they were not prepared to give financial estimates for next year. The company said its commercial customers would see premium increases averaging 15%, about the same as this year.