Ball Drops for PacifiCare on Wall Street in New Year
By VITA REED
Shares of PacifiCare Health Systems Inc. have taken a sharp turn in the New Year after a gainful 2003.
Wall Street concerns about competition and more modest assessments of what Medicare reform may mean for the Cypress-based health plan provider fueled a drop in PacifiCare’s stock last week.
In 2003, PacifiCare’s shares rose 130% as the company saw fruits from a two-year restructuring.
Since the start of the year, PacifiCare’s shares were down 7% as of last week, thanks to a gloomy report from Goldman Sachs & Co.
PacifiCare and its rivals aren’t likely to see the same hefty premium increases of the past few years in 2004, according to Goldman Sachs analyst Matthew Borsch. He lowered his ratings on PacifiCare and Humana Inc. of Louisville, Ky., to “underperform” from “in-line.”
PacifiCare and Humana “face more risk of local market competitive pressure in 2004,” Borsch wrote.
Officials at PacifiCare say they believe there still is room for growth. The company should be able to snare premium increases that will allow it to keep up with rising medical costs, they say, and see continued expansion of new plan offerings.
“It was a sector that had produced phenomenal results for all of 2003,” said Suzanne Shirley, PacifiCare’s vice president of investor relations. “The analyst, who’s entitled to his opinion, was making a stock call for his clients to tell them that he thought they should take some money off the table in a sector that’s done very well. Although he did say that over the long haul, he still thinks that the sector is a solid investment.”
The report raised other concerns.
Humana and Pacifi-Care “benefited disproportionately from slowing medical cost trends and the passage of Medicare reform legislation,” Borsch wrote. “But we think the lift from Medicare reform has mostly played out.”
PacifiCare and other plan providers are set to get $14 billion from last year’s Medicare Prescription Drug, Improvement and Modernization Act to entice seniors away from Medicare and into private plans.
But there are caveats. Under the Medicare law’s risk-adjustment provisions, Medicare health maintenance organizations with healthier members will get lower federal payments. One of the historical criticisms of Medicare HMOs has been that such plans often target relatively healthy seniors, rather than those who are sicker and use more healthcare 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 be either positive or negative,” Borsch wrote.
Medicare reform is “a good reason why our stock performed so well, particularly through the second half of the year when the prospect of Medicare reform started to become a reality,” PacifiCare’s Shirley said.
PacifiCare’s stock hit a 2003 low around 20 in March and surged around mid-June.
In the past two years, PacifiCare has cut its reliance on seniors by offering preferred provider and “consumer-directed” plans and by boosting commercial membership,workers enrolling in plans via their employers.
“We’ve had to continue to tell people that we haven’t changed our strategy in terms of trying to diversify our revenue stream so that we would never again be as dependent upon the government as a business partner as PacifiCare was in its past,” Shirley said.
Even so, the new Medicare law stands to boost PacifiCare’s Secure Horizons plan for seniors, according to Shirley.
“So, we will now return to a resumption of membership growth, so that changes our strategy,” Shirley said. “But it still doesn’t change our overall goal of having a more diversified business.”
PacifiCare’s hefty premium increases for employers last year,around 17%,also played a role in the stock price surge, as well as improved earnings, according to Shirley.
PacifiCare concurs with Borsch in that it doesn’t see the same type of hikes this year.
“We’ve been telling the Street that (we’ll have) premium increases in the mid-teen range, before buy-downs,” Shirley said.
A buy-down is where PacifiCare charges lower prices to employers if they choose to offer fewer benefits or shift more costs to workers through higher co-payments or deductibles.
“So, in other words, you negotiate a certain price and maybe it’s 14% instead of say, 17%,” Shirley said. “But then the employer agrees to hold down their costs,they’re going to make their employees pay more, and so, that may ‘buy down’ the cost increase to maybe 10% to 11%.”
