PacifiCare Chief Talks of ‘Gathering Storm’
By VITA REED
Howard Phanstiel, chief executive of Cypress-based PacifiCare Health Systems Inc., could have turned the health plan operator’s recent annual investor day into a party.
After all, PacifiCare’s stock is up nearly 40% in the past year, the fruit of a turnaround spearheaded by Phanstiel. Last week PacifiCare counted a market value of $3 billion.
But Phanstiel, sporting a tan summer suit and blue shirt, struck a decidedly cautionary note earlier this month at the Montage Resort & Spa in Laguna Beach.
“We’re emerging from a new calm and moving into the next storm,” Phanstiel told analysts and other attendees. “My job is to set the course and batten down the hatches so PacifiCare can weather the storm and sail to a new day.”
Runaway healthcare costs and a decline in hospitals could spell trouble for the industry and PacifiCare, Phanstiel said. The company provides health plans to about 3 million people and has annual revenue of $11 billion.
Health insurance premiums are far outstripping inflation and the growth in salaries for workers, he said. Inflation is around 3%, and earnings are up about 5%, but health premium growth is in the mid-teens, according to Phanstiel.
Meanwhile, the decline in hospitals could make it harder for PacifiCare to strike discounts in contract talks with hospital operators, Phanstiel said.
He showed a graphic illustrating that PacifiCare’s key markets,California, Arizona, Colorado and Texas,have fewer hospital beds per 100,000 people than the national average.
In Orange County, hospital operators such as Orange-based St. Joseph Health System are expanding. But the net result could be a wash depending on how plans by Tenet Healthcare Corp. play out. Santa Barbara-based Tenet is looking to sell four facilities here and could end up closing the hospitals if it can’t find buyers.
Phanstiel wasn’t all gloom and doom.
The Medicare Prescription Drug Improvement and Modernization Act signed by President Bush late last year should be a bright spot, he said.
The positives, according to Phanstiel: higher federal reimbursements, renewed hospital interest in treating Medicare patients and the eventual launch of full prescription drug coverage.
PacifiCare and other plan operators are set to get some $14 billion in federal funding thanks to the Medicare legislation.
In the days after PacifiCare’s investor conference, J.P. Morgan analyst Scott Fidel upgraded his rating on the company’s shares to “neutral” from “underweight,” primarily because of Medicare growth prospects.
The brokerage said that “as election-year noise subsides and seniors gain familiarity with the private-sector options,” PacifiCare could reach its target of 787,000 members in its Secure Horizons Medicare plan by the end of 2005.
As of May, PacifiCare had 688,137 Secure Horizons members.
J.P. Morgan also inched up its 2004 earnings estimate for PacifiCare to $268 million, up from $265 million.
PacifiCare itself sees net income of $264 million to $272 million for the year.
As for rising healthcare costs, Phanstiel said he sees growing political pressure bearing down on drug makers.
“When you think about it, Congress has whacked every other major industry in healthcare,long-term care, hospitals, health insurers, docs, laboratories,” Phanstiel said. “The only group that hasn’t been whacked is Big Pharma.”
Phanstiel also talked about what he called the “first storm,” or “managed care tempest,” which played out from 1995 to 2000 and saw a backlash against managed care.
Back then, he said, the industry saw moves to mandate benefits, the growth of direct marketing to consumers by drug makers and a tight labor market that led to employers offering more generous health benefits.
Phanstiel also threw a barb: “And finally, not to be left behind, (you had) aggressive action by the plaintiff bars in the states to find ways to sue healthcare plans.”
Plan operators also had a role in the backlash against managed care, Phanstiel said.
“What we failed to do was to correlate intervention with improved quality,” he said.
Doctors “did a good job of convincing consumers that intervention meant denial of care and worse health, not better health.”
PacifiCare and others also made a political mistake, according to Phanstiel.
“We failed to endorse an appropriate patients’ bill of rights on a timely basis and that caused our industry severe political pain,” he said.
At the end of the conference, Phanstiel took questions about whether he was concerned about the upcoming elections creating another gathering storm for the company.
He said he doesn’t necessarily buy into theories that Congress, whether President Bush is re-elected or defeated by Democratic rival John Kerry, would look at cutting Medicare funding to balance the federal budget. A similar scenario played out in 1997 with the original Balanced Budget Act.
During his presentation, Phanstiel referred to that $115 billion Medicare cutback as “the mother of all provider cost-shifting” and “the early beginning of the ‘Survivor’ show,” drawing laughter from the audience.
PacifiCare officials shared details with investors about a 2003 speech Kerry gave in support of an amendment of a Medicare bill that he was cosponsoring to stabilize the Medicare Plus Choice program and improve reimbursement rates, Phanstiel said.
“I think that we’re pretty safe,” Phanstiel said.
