PACIFICARE: Citing Managed Care Woes, CEO Steps Down
Stating that he lacked necessary experience in managed care operations, Pacificare Health Systems CEO Robert O'Leary yesterday resigned from the managed care company, the Los Angeles Times reports. O'Leary, with "a background in running medical groups and hospitals," took over as CEO in July. CFO Howard Phanstiel will serve as interim CEO. After a five-month search, O'Leary accepted the CEO position assuming that Santa Ana-based PacifiCare "needed a leader who understood health care and could strategically position the organization to take advantage of changes in the marketplace." However, PacifiCare's struggles have centered around its reluctance to switch from a capitation payment system to a "fee for service insurance model" (Bernstein, Los Angeles Time, 10/26). Two weeks ago, PacifiCare announced that it may report losses in the third quarter, primarily because of difficulty in evolving away from capitation (California Healthline, 10/11). In addition, similar to other Medicare HMOs, PacifiCare's Secure Horizons has suffered from low reimbursement rates from the federal government. O'Leary said, "Instead of a strategic long term play, this is really fundamental managed care stuff. I honestly had to say to myself, 'This is not where my skills are'" (Los Angeles Times, 10/26).
Company's Horizon Not Secure
Following O'Leary's announcement, PacifiCare's stock fell 13% to $10.44, a price 80% off the company's 52 week high of $72.31 in June. Ed Kroll, an analyst at SG Cowen & Co, said, "To be changing horses again here doesn't bode well for the company." Although PacifiCare's balance sheet and cash flow "are in good shape," Kroll noted that compared to competitors who are improving after many years of poor performances, PacifiCare is "stuck" (Rundle, Wall Street Journal, 10/26). Phanstiel, who joined the company in July with a background in insurance and finance, said it would take at least two years to completely turn around the company's finances and added that he would focus on "stabilizing the company and making a smooth transition" to fee-for-service. However, Todd Richter, a health care analyst with Banc of America Securities, noted that neither O'Leary's decision to resign nor Phanstiel's appointment "does anything to address the financial and structural problems racking the managed care giant." Richter added, "[PacifiCare] is not going to be in a growth mode for a while" (Los Angeles Times, 10/26).