PACIFICARE: Stock Falls 49% as Earnings ‘Stun’ Investors
Shares of Santa Ana, Calif.-based PacifiCare Health Systems "plunged" 49% last week after the insurer announced that higher-than-expected medical costs will cause it to "fall well short of Wall Street expectations," the AP/Houston Chronicle reports. While analysts expected the company to post third-quarter earnings of $1.90 per share, PacifiCare said it expects to break even or lose up to 10 cents a share, and that its earnings for the rest of the year will also fall below previous estimates. The insurer said higher hospital use by its members is to blame for the rise in costs, adding that it plans to shift more money into reserves to cover the increased claims. In addition, PacifiCare -- the nation's largest Medicare HMO with nearly 1 million members -- will freeze enrollment in its Medicare program "until it completes a review of its business to try to contain costs." Investors were "stunned" by the announcement, in part because premium increases and exits from unprofitable markets have helped the HMO industry to recover this year (AP/Houston Chronicle, 10/11).
A 'Grave' Situation
Even if PacifiCare opts to exit "its prized Medicare line," the insurer is legally prohibited from doing so until the end of 2001. Many analysts are also skeptical of a takeover, and say that buying the financially ailing company would "assume too many problems with too little hope for profit." Sheryl Skolnick, a health care analyst with BancBoston Robertson Stephens, said, "What you're seeing here is a recognition that this is not a one-quarter or even a one-year problem. Does that mean that Wall Street is writing then off as an investable stock? Yes. Does that mean that the company goes away? It's too soon for anybody to speculate on that." PacifiCare is evaluating all operations; layoffs and other cost-cutting measures could be planned. PacifiCare spokesperson Ben Singer said, "To a degree, Wall Street is right. They have concerns about the Medicare business and about our ability to move quickly (to accommodate other changes) in a way that will sustain the company." However, he added, "Our job right now is to look at all aspects of our business for the near and long term. And that's what the company's leadership is doing" (Bernstein, Los Angeles Times, 10/14).