PacifiCare Profit Drops 78% Amid Fast-Rising Costs

PacifiCare Health Systems Inc. said Tuesday that its second-quarter profit fell 78% and warned that premiums might rise about 15% next year as the biggest operator of Medicare health plans struggled with medical costs that rose faster than premiums.

Net income fell to $15.3 million, or 45 cents a share, from $69.2 million, or $1.96, a year earlier, the company said in a prepared statement after U.S. markets closed. Revenue rose 3.3% to $2.97 billion.

Santa Ana-based PacifiCare, which covers about 1 million Medicare customers, has battled rising costs in California after it renegotiated contracts so payments to doctors are based on their actual costs rather than on fixed monthly fees.

Last week, PacifiCare dropped plans to refinance its bank debt by selling $600 million in bonds and arranging $400 million in bank loans after it couldn’t sell the junk bonds. Its $800 million in bank debt and $100 million in senior notes expire at the end of the year.

“I don’t think they’re going to go bankrupt because the government won’t leave Medicare members high and dry,” Prudential Securities Inc. analyst David Shove, who has a “sell” rating on the shares, said before earnings were reported. “But I think they need help, and they need it pretty soon.”

Chief Executive Howard Phanstiel dismissed any suggestion that the company may face bankruptcy, and said the company may be able to cut its interest costs by extending its bank debt.

PacifiCare was expected to earn 33 cents a share, the average estimate of analysts surveyed by First Call/Thomson Financial, though those forecasts ranged from a profit of 45 cents to a loss of 38 cents. In July, the company said it would earn 45 cents.

Shares fell 10 cents to close at $12.37 on Nasdaq. The shares have fallen 81% in the last 12 months.

PacifiCare said its medical-cost ratio rose to 89.9% from 85.8% a year ago. Its Medicare ratio rose to 90.3% from 88%. The company said both ratios fell because customers didn’t use as many medical services as they did in the first quarter.

PacifiCare, which raised premiums 11% for employer plans and 7% for Medicare customers, warned Tuesday that it might raise premiums about 15% to 17% in 2002, Phanstiel said.

Separately Tuesday, one of California’s largest managed-care companies, Health Net Inc., said second-quarter profit rose 21% as it added customers and sold an unprofitable Florida health plan.

Profit from continuing operations rose to $46.9 million, or 38 cents a share, from $38.7 million, or 32 cents, a year earlier, Woodland Hills-based Health Net said. Revenue rose 14% to $2.55 billion.

Its results matched the 38-cent average estimate of analysts.

Health Net said it expects to earn 41 cents to 42 cents a share in the third quarter and $1.55 to $1.58 a share for 2001. The company expects profit of $1.80 to $1.85 a share next year.

Its shares rose $1.85, or 11%, to close at $18.35 on the New York Stock Exchange.