Seemingly Bad News Is Remedy for PacifiCare
By VITA REED
Santa Ana-based PacifiCare Health Systems Inc. just was told it has to pay some $88 million to the federal government to settle a dispute over charges for benefit services.
It also just found out it’s going to lose 190,000 members next year, when its health maintenance organization pact with the California Public Employees Retirement System ends. And, oh yeah, it plans to take a $900 million first-quarter charge from an accounting change.
Wall Street’s response: a 33% surge in PacifiCare’s shares since April 12, the day the settlement was announced. Since April 18, the day of the charge announcement and a day after the CalPERS news, the stock is up 18%. As of last week, PacifiCare’s market value stood at $870 million, 64% higher than it was March 1.
The volume of trading in PacifiCare shares soared in recent weeks, hitting a peak of 6.6 million shares on April 19, up from an average daily volume of 1.2 million shares. The company’s stock hasn’t seen this kind of action since February, when the company missed profit estimates and investors headed for the exits.
So what gives?
The seemingly negative news out of PacifiCare is actually good for the healthcare services provider, according to Jason Fox, a healthcare analyst with H & R; Block Inc.
“The settlement resolved an uncertainty,we view that as a positive,” he said.
The Justice Department recently said PacifiCare must pay to settle charges that some of its units deliberately overcharged the government for providing federal employee benefits between 1990 and 1997. The settlement covered disputes and a whistleblower lawsuit under the False Claims Act. PacifiCare said the allegations were primarily related to contracts held by FHP International Corp. health plans prior to PacifiCare’s 1997 buy of FHP.
“The resolution of outstanding items is a positive for Wall Street, typically,” said Dan Yarbrough, PacifiCare’s manager of investor relations. “The amount that we are going to end up paying is fully reserved (on our books).”
PacifiCare had set aside about $100 million to cover the lawsuit and said it would release the $12.8 million difference,which will add about 23 cents a share,to its quarterly results.
PacifiCare also resolved another uncertainty by saying on April 18 it had extended the maturity date on $735 million in credit by two years to 2005. Under the extension, PacifiCare has to pay back $250 million in credit by Jan. 2.
“One of the biggest pieces of news was the credit (extension),” H & R; Block’s Fox said, describing the previous expiration date of January 2003 as a “cloud” over PacifiCare.
“The extension gives them much more time to turn around the company, pay down debt,” he said.
“Banks don’t extend two years unless they know the first-quarter results,” said Thomas Shinkle Jr., a healthcare analyst with Beverly Hills-based Imperial Capital LLC. “They receive monthly statements. They knew that the first quarter was a good quarter, that it would meet expectations.”
PacifiCare is set to report its March quarter on Wednesday. A survey of analysts polled by Thomson Financial/First Call forecasts a profit of 70 cents a share before charges, vs. 39 cents a share a year ago.
As for 2002, PacifiCare officials now say they expect the company to earn around $3.60 a share. Analysts had previously expected $3.24 a share.
Meanwhile, PacifiCare’s Yarbrough said the company’s stock runup also could be aided by another factor.
“In the weeks leading up to our earnings release, our stock price rises because of the large short position in our stock,” he said.
As of March 15, short sellers,who bet on stocks to fall,held about 11.5 million of PacifiCare’s 35 million shares outstanding, according to Yarbrough.
“When you have favorable news, the shorts are killed. There are a few dead shorts laying around,” analyst Shinkle said with a laugh.
Citing the credit restructuring, Goldman Sachs Group Inc. analyst Charles Boorady raised his rating on PacifiCare shares to “market outperform.”
“Our upgrade is based on the reduction of debt-financing risk, the biggest near-term risk to equity holders in our view,” Boorady said in a research note.
The refinancing would reflect well on PacifiCare’s fundamentals, Boorady said. PacifiCare should benefit from “very strong industry pricing and expected deceleration in rate of medical cost increases,” he said.
And PacifiCare should come out ahead even as it loses CalPERS.
“The company has told me that they’re somewhere between losing money and breaking even,” Imperial Capital’s Shinkle said.
Yarbrough agrees: “The bottom line is that it will help our 2003 earnings,” he said.
CalPERS, which has about $150 billion in assets, is the nation’s second-largest buyer of health insurance. Officials of the Sacramento-based pension fund said in mid-April that they would drop PacifiCare and Health Net Inc. of Woodland Hills, cutting some $77 million from its budget next year.
PacifiCare admitted that its contract proposal carried a higher rate increase than CalPERS’ other healthcare providers. The pension giant said proposed rate increases were from 15% to 41%.
CalPERS’ board approved premium hikes of 25% for HMOs next year and between 18% and 22% for preferred-provider organizations. CalPERS said it will carry two statewide providers,Blue Shield of California and Kaiser Permanente,and three smaller, regional carriers, including Long Beach-based Universal Care.
“PacifiCare has been on the low end of CalPERS’ rates for some time,” Fox said. “We don’t see CalPERS as a negative. It’s just not a profitable book of business.”
PacifiCare has spent much of the last year and a half working to rebuild itself. The company has struggled for a number of reasons. Government payments for its Medicare patients aren’t covering its medical costs, for one. Medicare makes up a big amount of PacifiCare’s business.
Also, PacifiCare is still feeling the fallout from its 2000 split with St. Joseph Health System. The healthcare provider lost a number of patients after it refused to give St. Joseph a contract with rate increases the hospital operator wanted.
PacifiCare also is dealing with a Texas lawsuit filed in February alleging that its PacifiCare of Texas unit did not pay “many millions of dollars” worth of claims. PacifiCare has said those allegations are without merit and that the company will vigorously defend itself.
