Will Texas Lawsuit Halt PacifiCare Turnaround?

A lawsuit filed this month against PacifiCare Health Systems Inc. by Texas Attorney General John Cornyn (R) over the company's alleged failure to pay provider claims could "hamper" the health plan's turnaround efforts, the Wall Street Journal reports. While the potential liability from the lawsuit is unclear and "doesn't seem alarming" compared with the company's 2001 revenue of $11.84 billion, it could "jeopardize" PacifiCare's turnaround plan by "draining cash from other ventures and rekindling serious questions" about the company's ability to pay a $680 million loan due next January. PacifiCare, whose net income fell to $19 million last year down from $161 million in 2000, has been "struggling to shrink its staff and diversify into new ventures as" it exits from unprofitable Medicare+Choice markets. According to a statement issued by Cornyn's office, a successful lawsuit would cost PacifiCare "tens of millions of dollars." PacifiCare has "played down" the lawsuit and says that Cornyn is violating state law by trying to get the company to pay claims twice. The company contends that it has already paid $43 million more than it was "obligated to pay." But the Journal reports that short-sellers (investors who bet that a stock price will decline), who currently hold one-third of PacifiCare's shares available for trading, say that the California-based company "doesn't really know how big the problem is because it doesn't have a good enough handle on its Texas operations to properly estimate its liability." In addition, Roberta Goodman at Merrill Lynch issued a report last week that said PacifiCare is "likely to lose its legal contest." But Patrick Kaser, an analyst at Brandywine Asset Management, a large PacifiCare shareholder, said that the lawsuit and potential fine are "manageable." Kaser defended PacifiCare's strategy of fighting the lawsuit rather than settling, saying that the other insurers who have chosen to settle with Texas over its investigation into payment practices could be subject to a second round of fines or settlements (Rundle, Wall Street Journal, 2/28).