PacifiCare Weighs Pulling Out of Medicare

The nation’s largest purveyor of Medicare managed-care plans will “take a hard look” at whether to continue in that difficult market under a new chief executive appointed Thursday.

“We will not do anything precipitous,” said Robert W. O’Leary, who takes the helm at PacifiCare Health Systems Inc. after a long career in the hospital industry. “But we will take a hard look at it.”

O’Leary’s ascension and his remarks come at a time when health maintenance organizations are pulling out of Medicare in droves. This month, Cigna Corp. announced that it would drop 105,000 Medicare patients as it exits the market nationwide, and more defections are expected to be announced within the next two weeks.

O’Leary, 56, who holds degrees in law and public health, succeeds Alan R. Hoops as president and CEO. Hoops, 52, who presided over a period of great growth followed by a shattering three-year period of low profits, some losses and a drubbing in the stock market, lost the title of chairman late last year amid a management shake-up. Hoops announced in February that he would retire when a replacement was named.

PacifiCare stock fell $4.56, or 7%, to close at $61.56 Thursday on Nasdaq.

PacifiCare, which covers 1.1 million seniors in its Secure Horizons Medicare HMO and 3 million more people in commercial plans, has seen its stock price battered over the last year as investors questioned the company’s decision to remain in Medicare.

Other companies--and even PacifiCare on a smaller scale--have been gradually exiting Medicare over the last three years, ever since Congress reduced the amount of money the federal government pays to take care of seniors.

In addition to rethinking the company’s Medicare strategy, O’Leary said, he will examine the way the company pays doctors and hospitals.

“I’ve spent most of my career managing processes of change,” said O’Leary, a 35-year veteran of the health-care business who most recently served as president of Premier Inc., a hospital and medical group chain based in San Diego. And while promising not to bring wrenching changes to PacifiCare, he made it clear that some adjustments were on the way.

PacifiCare “is an organization that has been very adaptable,” O’Leary said, and “is operating in an environment that is rapidly changing.”

Any big shifts in PacifiCare’s business model are sure to have industrywide repercussions.

The company, which has 4 million members in nine states, was a pioneer in the model of managed health care that dominates the landscape in California. Its tightly controlled networks of doctors and hospitals are paid monthly fees known in industry jargon as capitation payments. These payments, which are fixed monthly amounts based on the number of patients, are meant to make up the entire budget used by a medical group or hospital in caring for those members.

But that system is breaking down in California and elsewhere. PacifiCare has already increased the amount it is paying to some doctors, and has stopped requiring others to pay for prescription drugs out of the monthly fees.

But if the company backs away from the idea even further, other insurers will probably do the same. That could radically reshape the health-care system, granting more freedom to doctors but making it even more difficult to rein in costs.