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Medicare Vogue Again at PacifiCare

Medicare Vogue Again at PacifiCare

By VITA REED

PacifiCare Health Systems Inc.’s love-hate relationship with Medicare is closer to love these days.

The company has the Medicare Prescription Drug Improvement and Modernization Act signed by President Bush late last year to thank.

Cypress-based PacifiCare and other health plan providers are set to get an added $1.3 billion in Medicare funding in the next three years. That’s already resulted in lower co-payments for the more than 680,000 members in PacifiCare’s Secure Horizons Medicare plan.

Medicare “never went out of being an important part of our business, as it was $6 billion strong in revenue,” said Kathy Feeny, senior vice president of PacifiCare’s Secure Horizons Senior Solutions division.

PacifiCare had sales of $11 billion last year.

But it wasn’t long ago that Medicare was a drag on PacifiCare,and a driving factor behind a diversification bid that’s played out in the past few years.

Back in the mid-1990s, PacifiCare and others plunged headlong into the Medicare health maintenance organization market, enticing seniors with benefits such as prescription drug coverage and health club memberships.

The rush cooled a few years back when the government capped Medicare payments with the Balanced Budget Act of 1997.

PacifiCare’s reliance on Medicare caused much hand-wringing among investors, who worried about low government reimbursements not keeping up with rapidly rising healthcare costs.

For a while in the late 1990s, PacifiCare prospered as its rivals backtracked from Medicare HMOs. But the higher healthcare costs soon caught up with the company.

Starting in 1998, PacifiCare began exiting rural markets and lopping off unprofitable Secure Horizons subscribers. In 2002, it cut more than 800,000 members from Secure Horizons, which once counted more than 1 million people.

“As funding was decreasing and healthcare costs were going up, we had to make some very tough decisions,and we did,” Feeny said. “We first put in premiums, we then put in co-pays. We’d take out brand (drugs), put generic in. Our last-ditch effort was to exit.”

Better Days

Things don’t seem so desperate these days.

Today, Secure Horizons has 688,000 members and is aiming to grow to about 736,000 by year’s end, according to Feeny.

Some of that growth could come from returning to markets PacifiCare left. Secure Horizons is looking at parts of Northern California, Texas and Colorado again, Feeny said.

“It doesn’t take a genius to realize that if you’re in healthcare, you’re going to be in the senior business in some manner,” Feeny said.

PacifiCare also is lobbying in favor of stronger federal support of Medicare and taking part in government outreach programs relating to Medicare.

Chief Executive Howard Phanstiel and other officials are “very, very strong in Washington,” Feeny said, “pushing the right kind of legislation to go through to sustain the program.”

Feeny said it was too soon to tell whether healthcare costs would catch up with the increased federal payments signed into law last year. The company still is working through the details but expects payments would be close to the actual rate of cost increases, according to Feeny.

Some healthcare watchers predict if President Bush is re-elected, he’ll pursue a balanced budget initiative, just like President Clinton did in his second term in 1997.

Another political variable is the president’s push to get more seniors into private plans. Starting in 2006, PacifiCare and other Medicare HMOs are set to receive $14 billion in federal funding to design programs that would entice seniors away from Medicare and into private plans.

Even if last year’s legislation hadn’t gone through, Secure Horizons would have been able to sustain about 300,000 members “and the last place standing would have been Southern California,” Feeny said.

PacifiCare’s historical reliance on Medicare for a good portion of revenue and profits has sometimes bemused and vexed Wall Street.

Back in January, when the federal Centers for Medicare and Medicaid Services said it would pay private Medicare insurance plans an average of 10.6% more for covering senior citizens, PacifiCare and rival Humana Inc. of Louisville, Ky., saw their stock prices rise.

At that time, Matthew Borsch, a managed care analyst with Goldman Sachs & Co., delivered a more modest assessment on what Medicare reform would mean for PacifiCare and Humana.

The plans, Borsch wrote, benefited disproportionately from the passage of Medicare reform, “but we think the lift from Medicare reform has mostly played out.”

Borsch also cited a key caveat of the law: Under its risk-adjustment sections, Medicare HMOs with healthier members will get less money from the government.

One of the longstanding criticisms of Medicare HMOs has been that they often target younger, relatively healthy seniors, rather than those who are sicker and use more medical services.

“With regard to Medicare reform, there remains substantial uncertainty over the earnings benefit from the new Medicare HMO rates, as well as the impact from the phase-in of risk adjustment, which could either be positive or negative,” Borsch wrote.

Even with that, Suzanne Shirley, PacifiCare’s vice president of investor relations, said the company hasn’t changed its overall strategy in terms of trying to diversify its business so that it “would never again be as dependent upon the government as a business partner as PacifiCare was in its past.”

Since 2000, PacifiCare has broadened its plan offerings to include a preferred provider organization and a consumer-directed health plan, among other changes.

PacifiCare also has made tweaks to Secure Horizons this year, lowering premiums and co-payments.

Also on the drawing board: a Medicare HMO plan aimed at lower-income seniors set for a June 1 rollout.

On Wall Street, some analysts still are cautious about what PacifiCare and its rivals would receive from the stabilization payments.

“We expect all or almost all the additional money will go toward physicians, hospital and drugs with little added profit opportunity,” wrote Charles Boorady, a Citibank Smith Barney analyst, in a research report earlier this year.

For Medicare HMOs, Boorady said, “the real advantage is that higher benefits will attract and retain more seniors, and provider payments will mitigate insolvency risk.”

Because of competition in the Medicare HMO market and a tendency for seniors to plan-hop, “we expect Medicare HMOs to use much of the new money this law gives them to make the product more generous and thereby pass the new money to members in order to prevent a competitor from luring those customers away,” Boorady wrote.

Brand-Name Drugs

That’s already playing out at Secure Horizons: A majority of its members now can get a wider selection of brand-name drugs.

“What the increased funding has permitted us to do is one, to greatly enhance the prescription benefit that’s part of our (Medicare+Choice) program,” said Jacqueline Kosecoff, PacifiCare’s executive vice president of pharmaceutical services.

The enhancement, Feeny said, has boosted the number of Secure Horizons members who have access to and coverage for name-brand drugs to 63% from 30% prior to the funding boost.

“Second to premium coming out, pharmacy is right up there in terms of being near and dear to the seniors’ hearts,” Feeny said.

Secure Horizons’ new drug list offerings include Aricept for Alzheimer’s disease, tamoxifen, which is a breast cancer treatment, Lipitor and other cholesterol-fighting drugs, as well as the ever-popular Viagra.

Last year’s legislation also should give a boost to PacifiCare’s Costa Mesa-based Prescription Solutions subsidiary, which runs a large mail-order pharmacy operation in Carlsbad.

“Seniors use mail order in greater proportion than the commercial population,perhaps that’s a reflection on the fact that they have more chronic maintenance drugs,” Kosecoff said.

Along with more drug coverage, Secure Horizons’ Medicare+Choice members also have a drug discount card that gives them a price break on their prescriptions, “if, for some reason, their insurance runs out,” Kosecoff said.

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