PACIFICARE: Announces Strong Second-Quarter Earnings
PacifiCare Health Systems Inc. announced second-quarter profits far beyond experts' expectations, as it "began to get a handle on rising medical costs." Bloomberg News/Los Angeles Times reports that PacifiCare, one of California's largest health insurers, earned $48.8 million in the second-quarter, up from $18 million during the same period a year ago. The profits equated to $1.06 per diluted share, outpacing First Call Corp.'s estimate of 92 cents. PacifiCare's medical-loss ratio, which measures the amount of premium revenue spent on medical care, "fell to 85.1% from 86.5% a year earlier." PacifiCare, the "top operator" of Medicare HMOs in the state, "held down costs in commercial medical plans by increasing the number of contracts that pay doctors a flat fee per patient rather than a fee for each procedure," according to Bloomberg/Times. The improved earnings signify that the company is finally rebounding from the difficult early stages of its $2.2 billion acquisition of FHP International Corp., "whose money-losing Utah operations turned out to be in worse shape than originally thought," Bloomberg/Times reports. "People forgot that eventually you get to the good times in these acquisitions. Now you're starting to see the synergies of the deal," said Greg Crawford, an analyst with Fox-Pitt, Kelton Inc. PacifiCare plans to sell the Utah branch as soon as possible.
Why So Glum, Chum?
Despite the good news, "PacifiCare's stock fell 4.7% as investors questioned a decline in the money the company has set aside to pay medical claims and other benefits." While the reserve amount was level at 32 days in the first quarter, it has since dropped to 30 days. Peter Costa, an analyst at ABN Amro Inc., said, "You never like to see the reserve days decline, especially when it's a continuing trend. It makes you question the quality of the earnings." In response, shares fell $3.44 to $69.13 on 1.25 million shares traded. "Things are being taken to extremes at this point, so stocks will overreact to marginal information," said Strong Capital Management analyst Kevin Holt (8/6).