PacifiCare Announces Enrollment Freeze After Income Decline
After reporting "disappointing" third quarter earnings, PacifiCare Health Systems Inc. announced yesterday it would freeze enrollment in its Medicare HMO program in 24 California counties beginning next year, the
Los Angeles Times reports. PacifiCare reported a net income in the quarter of $5.2 million, down from $69.3 million in the third quarter of 1999 -- a 92% decline. The latter figure included a one-time credit of $3.8 million, "without which income would have been $1.4 billion." PacifiCare did, however, manage to beat expectations, as the company
warned last month that it would probably do no better than break even. In addition to freezing enrollment, PacifiCare will "implement dramatic premium hikes in 2001" -- possibly up to 25% -- for its 3 million non-Medicare members (Bernstein, Los Angeles Times, 11/10). Although PacifiCare's revenues went up due to premium increases in both its commercial plans and its Medicare HMO program, Secure Horizons, income decreased heavily because of rising medical costs and the method by which the Medicare HMO contracts with hospitals. PacifiCare has had difficulty switching from a capitated payment system -- in which the company pays providers a fixed monthly amount regardless of the amount of care given to a patient -- to one in which it pays an amount proportional to patient risk and treatment. PacifiCare, like other Medicare HMOs, is also suffering from low federal reimbursements (Wolfson,
Orange County Register, 11/10). Because of the move away from capitation, "PacifiCare can no longer simply expect hospitals and doctors to absorb any extra costs," the Times report. Despite these difficulties and the impending premium increases, acting PacifiCare CEO
Howard Phanstiel said more than 50% of current Secure Horizons members have re-enrolled for next year. However, he expressed concern that these individuals are the "sickest members" who "cannot switch to other health plans because of preexisting conditions," thus potentially increasing the company's expenses. The California counties where Secure Horizons will freeze enrollment beginning Jan. 1 are: Alameda, Butte, Contra Costa, El Dorado, Fresno, Kern, Madera, Marin, Napa, Placer, Riverside, Sacramento, San Bernardino, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Solano, Sonoma, Stanislaus and Tulare (Los Angeles Times, 11/10).
On a related note, PacifiCare also said yesterday it has "set aside a reserve" to protect against the possible loss of a $9.7 million loan it made to
KPC Medical Management in September as part of a $30 million
bailout. This set-aside is part of a $24 million reserve against PacifiCare's losses "associated with insolvent doctor groups and uncollected loans." Phanstiel said, "We think there is a higher probability that our loans will not be paid, as a result of the changing position that KPC is in," adding that recent physician defections from KPC caused PacifiCare to lose members and subsequently revenue. Discussing the set-aside, KPC President Donald Smallwood said PacifiCare is "being conservative, as they need to be, because I don't think Wall Street needs any more surprises." Yet the decision does not portend well for KPC, as it has not received all of the loan money promised by health plans and other contributors in the medical group's bailout two months ago. "We expect the money will be forthcoming," Smallwood said, but California Department of Managed Health Care Director Daniel Zingale said, "There is reason to be concerned about the quality of care of patients within KPC." He added that in the event that KPC does collapse, he believes there will be "enough other doctors groups to pick up any dislocated KPC patients" (Wolfson, Orange County Register, 11/10).