PacifiCare Cuts Earning Estimates, Pointing to High Costs in California

Citing "higher-than-expected medical costs" at its California health plan operations, PacifiCare Health Systems Inc. has "slashed" its earnings estimates for the year from a profit of $99 million to between $56 million and $59 million -- a decrease of as much as 43%, the Wall Street Journal reports. PacifiCare President and CEO Howard Phanstiel said, "With the exception of California, all of the company's other businesses ... are meeting expectations for the year." Company officials said that "continuing difficulty in forecasting medical-cost increases" while PacifiCare changes the way it pays hospitals and doctors is responsible for the lowered earnings (Lunsford, Wall Street Journal, 5/31). Under its new business strategy, implemented to "get a grip on higher medical costs," PacifiCare is switching from a capitated system to shared-risk arrangements. Phanstiel said, "Although our overall turnaround is progressing, the cost pressures we face under new risk-based agreements appear more troublesome in California than elsewhere and will take somewhat longer to get under control" (Los Angeles Times, 5/31). California PacifiCare beneficiaries represent 60% of the company's members. Phanstiel said that the company is "taking a number of actions" to address the problems in California, including increasing premiums for businesses renewing their contracts this or next year and enrolling beneficiaries in disease-management programs (Wall Street Journal, 5/31). In addition, new hospital contracts are "expected to yield results in the latter part of the year," Phanstiel said (Los Angeles Times, 5/31).

PacifiCare CFO Gregory Scott, said, "We view this as ... a relatively minor setback in the scheme of things." But Banc of America Securities analyst Todd Richter said, "The real issue with this company is 2002. The trend line would indicate that they're going to have trouble making money next year" (Wolfson, Orange County Register, 5/31). Peter Costa, an ABN AMRO Inc. analyst, added, "From my point of view, they still have a long way to go, so there is no way to tell if this is the last earnings (projection) cut" (Wall Street Journal, 5/31).