FOUNDATION HEALTH: Posts 3Q Charges, Expects Positive Cash Flow
Los Angeles-based Foundation Health Systems Inc. announced yesterday that its third-quarter pretax charges total $175 million. Before restructuring and other charges, however, the company reported that its 3Q earnings from operations are 24 cents a share. When FHS' officially records its 3Q results next Tuesday, it expects to report a positive cash flow from operations and an increase in reserves for medical claims payable. "Our focus on cash flow produced dramatic improvement in the quarter vs. the first half of the year," said CEO Jay Gellert. "Along with higher reserves and a reduction in accounts receivable in our government contracts line of business, this represents very encouraging news," he said. Executive Vice President and CFO Steven Erwin said the charges were a "result of cost-reduction programs at several of the company's health plans" and "management's determination to align the balance sheet with our new strategic direction."
The $175 million charge includes $21 million for severance pay for staff reductions, $22 million for asset impairment, $37 million for Medicare contracts in the Northeast, $14 million related to the government contracts division and $32 million related to California operations. The asset impairment charges resulted from clinics that FHS leased to now-bankrupt FPA Medical Management Inc. Last quarter, FHS took a $50 million charge related to this deal ( see CHL 8/6). However, charges had to be taken again this quarter because the leasing negotiations FHS was conducting last quarter did not reach a successful conclusion. The California- related charges resulted from payment issues with provider groups and costs associated with exiting Medicare in rural markets (FHS release, 11/3).