PACIFICARE: PROBLEMS RESULT FROM FHP ACQUISITION
"PacfiCare Health Systems Inc.'s four-month-old marriage toThis is part of the California Healthline Daily Edition, a summary of health policy coverage from major news organizations. Sign up for an email subscription.
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
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."
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"