Medicare’s been good for Cypress-based PacifiCare Health Systems Inc. of late.
Last week, the health plan operator upped its 2006 revenue projection, thanks to higher government payments to its Medicare plans for seniors.
The payments and other Medicare gains for PacifiCare stem from 2003’s Medicare Prescription Drug, Improvement and Modernization Act, which earmarked billions in federal spending to PacifiCare and other Medicare plan providers.
PacifiCare’s stock jumped on last week’s positive guidance. But some are wondering how long the Medicare party can go on, and if the government will be able to live up to what it’s promised.
“The growth of these programs is simply unsustainable,” Douglas Holtz-Eakin, head of the Congressional Budget Office, said in a speech before the World Healthcare Congress earlier this year. “Big changes are coming regardless of what you might think at the moment.”
Analysts who follow PacifiCare also foresee cuts to Medicare as President Bush looks to rein in spending in his final term.
|
|
||
“Beyond the (fourth-quarter 2004) earnings season, we see more downside than upside,” Goldman Sachs & Co. analyst Matthew Borsch wrote in a recent report.
Bitten Once
PacifiCare has been here before. The company got squeezed a few years back after President Clinton sought to balance federal spending in his second term. Investors soured on the company’s reliance on the federal government for a good part of its revenue and profits.
These days, Medicare makes up 47% of PacifiCare’s revenue, down from 55% in 2000. Chief Executive Howard Phanstiel has made a big push to get more business from workers enrolling in health plans via their employers.
“We will never be overly dependent on Medicare again,” PacifiCare spokesman Tyler Mason said. “You’ve been a witness to our need to diversify, and we’ve been very vigilant. We watch the trends, work with the (political) leaders and our providers and do the math.”
Investors have applauded PacifiCare’s efforts. The company’s stock is up 50% in the past year with a recent market value of $5 billion.
But Medicare still is a big chunk of PacifiCare’s business. And the possibility of another whack isn’t far out of mind. PacifiCare’s stock slumped before and after Bush unveiled his more austere budget proposal in February.
Several on Wall Street are wondering whether Bush and Congress can find the money to pay for the funding called for in the 2003 Medicare reform.
Gains from Medicare reform already have played out for PacifiCare, according to Borsch of Goldman Sachs & Co. Same goes for rival Humana Inc., the Louisville, Ky.-based health maintenance organization operator, he said.
“We believe that the Medicare upside is largely priced into both stocks at this point, given the disproportionately strong rally in both stocks since the Bush-Republican electoral victory in early November,” Borsch wrote.
PacifiCare’s stock rushed up 80% from the time of Bush’s re-election until it released its fourth-quarter results early this year.
PacifiCare is hoping to cushion any Medicare cuts with growth in its other businesses. As part of Phanstiel’s diversification bid, the company has rolled out plans for businesses, including a preferred-provider organization and a “self-directed health plan” meant to tap into the nascent consumer-driven healthcare market.
But analyst Borsch is cautious about what PacifiCare calls its commercial business, writing that the company faces “significant risks.”
Competition and price cuts from rivals,particularly from non-profit Blue Cross companies armed with surplus earnings,could drive down premiums, according to Borsch.
And visits to doctors and other healthcare providers could grow, he said, as more workers gain insurance with the stronger economy. That would drive up PacifiCare’s costs.
Not everyone is so concerned. Two CIBC World Markets analysts, Carl McDonald and James Naklicki, said they see coming Medicare changes as beneficial for PacifiCare.
They include reimbursement for drug coverage, PacifiCare’s role in the coming drug program for 36 million seniors enrolled in Medicare and the possibility of seniors moving into private HMO plans.
PacifiCare has a head start on private Medicare plans with more than 700,000 enrollees in its Secure Horizons Medicare Advantage HMO plans, the analysts wrote in a report.
The company also operates its own pharmacy, Prescription Solutions, which could benefit from the senior drug program that kicks in next year.
Prescription Solutions, which is based in Costa Mesa and provides drugs and other products by mail order, is another unit that’s grown under Phanstiel. Overall, the company’s specialty business unit, which includes Prescription Solutions, accounted for nearly $700 million in revenue last year, up 40% from a year earlier.
But CIBC’s McDonald and Naklicki have concerns. Medicare Advantage, the federal government’s program to fund private HMOs, “has been unstable over the last decade, to say the least,” they wrote.
The program, formerly known as Medicare plus Choice, has seen “major reimbursement increases and program expansions in the late 1990s followed by decelerating rates and market exits for much of the early 2000s,” they said.
Around 5.5 million seniors are enrolled in Medicare Advantage today, down from 6.4 million in 1999, according to the analysts.
Medicare revenue dipped below the 50% mark for PacifiCare in 2002, roughly a year after Phanstiel switched from interim chief executive to the company’s permanent leader.
In actual dollar terms, PacifiCare’s 2004 Medicare revenue of $5.8 billion is about the same as in 2002. In 2000, Medicare revenue was $6.4 billion.
Privatizing Medicare
Borsch of Goldman Sachs said PacifiCare and its rivals could double industry revenue if Republicans succeed in their bid to push Medicare enrollees into private HMOs as a replacement for a government plan.
“The growth opportunity could be substantial given that about 35 million seniors currently are in Medicare and with rapid growth projected in the over-65 population,” Borsch said.
Less than 5 million seniors belong to private Medicare plans now.
But privatizing Medicare could be like trying to get seniors to quit Social Security for private retirement accounts, Borsch wrote.
“At this point, even with higher Medicare HMO benefit levels and ramped-up marketing, seniors appear reluctant to trade traditional Medicare for the added benefits but tighter restrictions of managed care,” he said.
PacifiCare has been a pacesetter in Medicare, particularly during the 1990s, when it and rivals rushed to sign up relatively healthy senior citizens who were just entering the Medicare program.
Back in those days, PacifiCare and others greased the wheel for seniors with incentives such as health club memberships and drug plans. Reimbursements were high then. And there was a perception that the baby boomers’ generation would be lucrative for managed care.
The rush cooled after the Balanced Budget Act of 1997 capped Medicare reimbursements, leading to benefit cutbacks and exits. That led PacifiCare and others to lobby for restoring funding, culminating with Bush’s reform law.
