PACIFICARE: PROBLEMS RESULT FROM FHP ACQUISITION

      "PacfiCare Health Systems Inc.'s four-month-old marriage to
 managed-care rival FHP International Corp. is off to a miserable
 start," Wall Street Journal reports.  Following an announcement
 last week by Cypress, CA-based PacifiCare "that bad news was
 coming," the HMO's shares dropped by 27%.  The company said that
 "[s]econd quarter per-share earnings will be between 30 cents and
 45 cents, a fraction of the average $1.16 forecast by analysts." 
 Company officials "blamed most of the earnings shortfall on FHP
 while acknowledging less serious problems in PacifiCare's core
 California operations."  Journal reports that "it appears that
 FHP managers stopped minding the store last summer when they
 agreed to sell the company for $2 billion" (see AHL 2/18). 
 PacifiCare said that "[t]he situation quietly deteriorated as
 state and federal regulatory obstacles delayed the closing until
 Valentine's Day."
      ANALYST ANGLE
      Journal reports that it is "not clear how long the FHP
 problems will continue to dog PacifiCare."  Some industry
 analysts believe "that the company may be forced to take a charge
 of several hundred million dollars in the coming quarters to
 write down the goodwill it took on with the acquisition." 
 According to the Journal, "[i]ntegration of the PacifiCare and
 FHP operations was supposed to go smoothly, given the companies'
 common focus on the California Medicare market and their quick
 agreement that PacifiCare's highly regarded management team would
 take charge."  However, in order to keep its members "late last
 year when it was still in escrow, FHP allowed members in some
 markets more flexibility in selecting doctors, including some
 whose contracts were much less favorable to the HMO."  In
 addition, difficulties have arisen in integrating the companies'
 two computer systems, which has "led to poor information about
 rising medical costs in some regions."  According to the Journal,
 "That in turn meant that HMO prices were set at unprofitably low
 rates."  PacifiCare officials said that they hope to correct the
 situation "with rate increases next year of up to 10% in Utah and
 five percent in California -- a rise that appears optimistic."  
      THE PROBLEMS
      According to PacifiCare executives, half of the earnings
 shortfall is due in part "to problems in FHP's Utah and
 California operations, with the other half split among FHP and
 PacifiCare operations in Nevada, Texas, California and Oregon." 
 They said that income from FHP operations, including the sale of
 HMOs in New Mexico and Illinois, "will be short by about $100
 million in 1997, with another $20 million shortfall now expected
 in PacifiCare's core California operations."   Journal reports
 that the "problems in Utah illustrate some stark differences
 between" PacifiCare and FHP.  PacifiCare "arranges medical care
 by contracting with independent doctors and hospitals," while FHP
 delivers care "through its own hospitals and salaried doctors." 
 At the time of its acquisition by PacifiCare, "FHP was in the
 process of converting into a contract-model HMO by spinning off
 its medical groups into a new publicly traded company called
 Talbert Medical Management."  As a result, FHP's "new contracts
 in Utah, hurriedly signed to preserve FHP's membership there,
 paid some doctors more than they would have received under an
 approach favored by PacifiCare."
      OTHER PROBLEMS AND SOLUTIONS   
      PacifiCare said that its "profits in California continue to
 be squeezed by higher-than-expected prescription drug costs and
 by higher health care costs in its Medicare HMOs."  The company
 also said that its cost-cutting efforts "have been stymied by"
 the California Department of Corporations, "which has so far
 required PacifiCare to keep its health plans separate from those
 of FHP."  Company officials said that they "hope to get approval
 next month to merge those plans."  PacifiCare President and CEO
 Alan Hoops said, "The fundamental solution to our problems is
 health care cost management.  The message I want to send today is
 that, by and large, we have plans to deal with the problems"
 (Rundle, 6/30).