PacifiCare Sees Predictability After Erratic Two Years
By VITA REED
Howard Phanstiel, PacifiCare Health Systems Inc.’s chief executive, says the managed care company’s business is growing more predictable after a run of up-and-down financial results and earnings surprises in the past two years.
“We’ve had six consecutive quarters of not having an earnings miss, and our ability to predict the performance of the business is getting better with each succeeding quarter as we complete the turnaround,” Phanstiel said.
Wall Street appears to be buying that message,PacifiCare’s stock has more than doubled since mid-February. As of last week, the company counted a market value of $1.7 billion. The Cypress-based company has outperformed most of its peers on Wall Street, including Aetna Inc. and UnitedHealth Group Inc.
Since 2000, PacifiCare has been working to shed its reliance on Medicare by venturing into new areas, such as consumer health plans and prescription coverage for seniors. It’s also lopped off more than 800,000 marginally profitable Medicare plan members and raised prices as part of its restructuring.
The reworking made for a big first quarter. PacifiCare earned $71 million in the period, versus a loss of $859 million a year earlier. Revenue fell 4% to $2.7 billion.
In April, PacifiCare raised its profit outlook for the first quarter and the rest of the year, citing lower-than-expected healthcare costs.
The earnings gain should help PacifiCare “as higher cash flow allows for the (paying down) of higher debt load,” wrote analyst Matthew Borsch of Goldman Sachs Group Inc.
Last month PacifiCare took out $300 million in new financing to pay off existing debt. As of March 31, PacifiCare counted $576 million in long-term debt.
PacifiCare is about 90% through its turnaround plan, according to Phanstiel. But the company still faces challenges.
About half of PacifiCare’s revenue comes from Medicare. Critics say Phanstiel needs to get more revenue from employers buying healthcare for their workers.
They also point out that soaring healthcare premiums were a big factor in PacifiCare’s first-quarter results. That could change if an employer backlash against rising healthcare costs intensifies.
Last year, PacifiCare lost nearly 200,000 members when the California Public Employees Retirement System balked at higher premiums.
“The company now believes enrollment growth could exceed expectations, but this could be challenging given that its roughly 18% net premium rate increases are 400 to 500 basis points above the industry average,” wrote Joseph France, a managed care analyst with Banc of America Securities in New York.
Phanstiel said he sees costs moderating, not declining.
“The good news for consumers and employers is that the rate of healthcare cost increase is beginning to decelerate,” he said. “It’s already begun to be reflected in our prices. And I certainly hope that trend continues. But I’m not confident that it will slow down that much further for a while.”
PacifiCare and others are trying to come up with ways to make healthcare more affordable, Phanstiel said.
“But at the end of the day, there’s no question that healthcare is going to become more costly,” he said.
“We think that means the consumer’s going to have to pay a greater share of the bill, and consumers are going to be more demanding. So this is no longer a business about organizing networks and stamping claims paid,it’s about service, it’s about customers,” Phanstiel said.
PacifiCare’s come out with some 20 new offerings in the past year and a half. They include a preferred provider organization with more flexibility in seeing doctors and a “self-directed health plan” that includes a PPO and a medical savings account,a key factor in the nascent consumer-driven healthcare movement.
“What we’re trying to do to counter rising costs and inflation is to design products” that give consumers more choice and offer lower-cost options, Phanstiel said.
A small-group version of the self-directed health plan would cost about $90 per worker per month, Phanstiel said, versus $180 for a commercial health maintenance organization and $220 for a PPO.
The litmus test for the new offerings comes in January: “Can we show significant growth in membership as we’ve repositioned ourselves?” Phanstiel said.
PacifiCare, which counts 2.2 million subscribers, expects to add 370,000 new members this year, according to Banc of America’s France. He called that “aggressive,” given that rivals WellPoint Health Networks Inc. and Blue Shield have similar offerings.
PacifiCare also has worked to improve its ties with hospitals and other providers. Those relationships became strained in recent years, marked by a contract dispute with Orange’s St. Joseph Health System in late 2000.
Capitation,paying providers a set fee per member, per month for health services,was the flashpoint of many of the disputes. Hospitals and doctors demanded that managed care companies such as PacifiCare share the costs when treatment exceeded those caps.
PacifiCare expects 10% of its California business to go from capitation to shared-risk contracts, which was planned for and priced into its business, Phanstiel said.
The speed of paying claims by doctors also is getting better, Phanstiel said.
“We want to pay claims one time, on time, every time,” he said.
Earlier this year, PacifiCare settled claims with Texas regulators that it hadn’t paid Lone Star state doctors on time for their services treating PacifiCare members.
As for changes to Medicare, Phanstiel said, “I learned a while ago that predicting the behavior of homo legislatus is a tough endeavor. We have to assume that we continue to operate under current law.”
Last week, a Medicare drug and reform proposal started making its way through the Senate.
Shopping Money
Higher healthcare premiums and reduced costs are making for a war chest at PacifiCare Health Systems Inc.
Earlier this month, Chief Financial Officer Gregory Scott told investors and analysts that PacifiCare expects to generate as much as $345 million in 2003 cash flow from operations, or about 1.5 times net income.
That cash could be used for acquisitions to spur PacifiCare’s diversification, according to Chief Executive Howard Phanstiel. That would mark a strategy shift for the managed care company.
“We’ve been using our free cash in the last two years to build up statutory surpluses, statutory capital,that’s very important to the rating agencies,and we’ve also been using some of it to reduce our debt,” Phanstiel said.
PacifiCare also is marking its 25th anniversary this month with a variety of events at its Cypress headquarters. The company has what Phanstiel calls “an anniversary in the box” including a videotape of events at the headquarters.
“We can’t celebrate it 25 times over with the same people,” Phanstiel said.
,Vita Reed
