PHSY ($12-$13-$12) P/E 4 In line, Rev's Rose.
PacifiCare Health Systems Reports 2nd Quarter 2001 EPS of $0.45; EPS, EBITDA and Medical Care Ratios Show Improvement From 2001 First Quarter
Business Wire - Tuesday, July 31, 2001
SANTA ANA, Calif.--(BUSINESS WIRE)--July 31, 2001--PacifiCare Health Systems Inc. (Nasdaq:PHSY) today announced that net income for the second quarter ended June 30, 2001, was $15.3 million, or $0.45 per diluted share. This compares with second quarter 2000 net income of $69.2 million, or $1.96 per diluted share.
The year-over-year decline in net income is primarily the result of rising health care costs in the company's commercial and Medicare lines of business, reflecting the significant shift in hospital contracts from capitated to per diem, fee-for-service or risk-based arrangements over the past 18 months.
Howard G. Phanstiel, PacifiCare president and chief executive officer, noted the improvement achieved in the second quarter over the 2001 first quarter EPS of $0.39: "We believe that our improved results over the first quarter are indicative of the progress being made to turn around the company.
"We're pleased that the company has generated four consecutive quarters of stable to moderately improved EBITDA while we manage through a significant change in our business model. In addition, we saw sequential improvement from the first to the second quarter as we benefited from reductions in both our commercial and Medicare medical care ratios."
Revenue Growth and Membership
For the quarter ended June 30, 2001, total operating revenue increased 3% to $3 billion compared with the same period a year ago, driven by a 7% increase in Medicare premiums. Commercial premiums, including specialty companies, declined 2% from the year-ago quarter because of membership losses, offset by premium rate increases averaging 11%.
Consistent with the company's strategic decision to exit unprofitable markets, the company's HMO membership dropped to approximately 3.6 million on June 30, 2001, from 4 million members a year ago. Commercial HMO membership decreased 13% due to planned market and product exits, rate increases and provider network terminations.
Membership in the company's Medicare + Choice program fell 1% as a result of county exits and limits on new enrollment in 42 out of 101 counties.
Other income, principally from the company's specialty businesses, grew 11% from the second quarter of 2000, primarily due to increased mail service revenue from the company's pharmacy benefit manager, Prescription Solutions. Net investment income rose to $33 million, including $6 million of gains on marketable securities.
"It was prudent to take gains on our fixed income portfolio, especially in light of the increase in our effective tax rate in the second quarter," said Greg Scott, chief financial officer. The effective tax rate in the 2001 second quarter increased to 54.3% on a non-recurring basis from 47.5% in the first quarter, lowering EPS in the second quarter by $0.07.
Membership grew at the company's pharmacy benefit management and behavioral health subsidiaries. Prescription Solutions' membership grew 21% in the second quarter compared with the prior year through the addition of membership that is not affiliated with PacifiCare health plans.
The increase represented about a third of the 600,000 new unaffiliated members that Prescription Solutions has signed this year, with the balance scheduled to come on line later in 2001. PacifiCare's behavioral health HMO membership grew 9%, while behavioral health membership unaffiliated with PacifiCare plans increased 26%.
Health Care Costs
Fee-for-service or risk-based provider contracts continued to increase the company's health care costs. However, in 2001 the company has experienced a more moderate transition from hospital capitation compared with 2000, which is helping the company stabilize its medical care ratios.
Following a 20% shift in hospital membership from capitated to risk-based arrangements in 2000, in the current year there has been just a 6% move in membership to risk-based hospital contracts, which is consistent with previous guidance.
On a sequential quarter basis, the 2001 second quarter consolidated MCR and commercial MCR both improved by 30 basis points, and the Medicare MCR improved by 40 basis points. The MCR improvements from the prior quarter primarily reflect higher revenues and lower seasonal utilization trends.
The Medicare MCR also benefited from higher premiums resulting from new federal legislation that was in effect the entire quarter, compared with just one month of the first quarter.
Year-over-year MCR increases are due to higher health care costs under risk-based arrangements that were not anticipated in 2001 commercial pricing that was completed in 2000, and the failure of the federal Medicare + Choice program to raise premiums at a rate consistent with medical inflation. The June 30, 2001 consolidated MCR increased to 89.9% from 85.8% in the year-ago quarter.
The Medicare MCR increased to 90.3% at June 30, 2001 from 88%, while the commercial MCR was 89.2% compared with 82.9% for the same period of 2000.
Medical Claims and Benefits Payable
Medical claims and benefits payable totaled $1.1 billion at June 30, 2001, compared with $1.3 billion at March 31, 2001. The decrease was primarily related to the increase in cash payments of claims that were previously part of the reserve established for claims incurred but not yet paid or reported (IBNR).
This step up in claims payments was a result of productivity improvements and claims processing systems enhancements that the company has implemented to keep pace with its growing risk-based business. The decrease in risk-based membership due to planned market exits further contributed to the decline in the IBNR reserve level.
"We continue to pay claims faster through enhanced staff support and upgraded systems that allow us to handle a higher volume of claims more efficiently. We also made a concerted effort in the quarter to focus on reducing higher-dollar claims in our Medicare claims inventory," said Greg Scott. He also noted that the company's California operations improved their claims payment turnaround by about 20% in the second quarter.
Days claims payable for the quarter decreased sequentially to 39.3 from 42.9 days, and increased from 37.6 days at June 30, 2000. Days claims payable for just the risk-based portion of the company's business was 74.3 days compared with 83.4 days at March 31, 2001. Days claims receipts on hand stood at 8.9 at June 30, 2001.
"Days claims receipts on hand are now well within our company standard of 10 days," Scott added.
MG&A Ratio
The marketing, general and administrative (MG&A) cost ratio of 10% for the second quarter of 2001 was 40 basis points below the prior year and 20 basis points above the previous quarter. The year-over-year improvement reflects Medicare marketing and overhead staffing reductions made in January 2001, as well as technology-driven productivity improvements and higher revenues.
While MG&A expense was comparable with the prior quarter, the slight increase in the MG&A ratio over the first quarter reflects the impact of membership declines on the company's revenue base and staff additions required to manage a larger risk-based business and to launch new products.
EBITDA and Cash Flows
Earnings before interest, taxes, depreciation and amortization (EBITDA) rose to $87.3 million from $80.3 million in the 2001 first quarter.
The company generated free cash flow (net income plus depreciation and amortization, less capital expenditures) during the quarter of $36.2 million, while the company's free cash at corporate averaged $130 million, despite a $30 million debt repayment made in April.
2001 Initiatives
Phanstiel said, "We have now completed six months of corrective actions to strengthen our core business and to broaden our health insurance portfolio, which are the initial phases of our evolution from an HMO into a leading health and consumer services company.
"In the second half, we intend to stay focused on securing the remainder of this year's business renewals, on stabilizing pricing for 2002 renewals, and on generating profitable new membership growth.
"As we disclosed last week, we will continue to work over the coming months on debt refinancing solutions to repay or extend our existing credit facility. While we are disappointed that market conditions hampered our initial debt refinancing efforts, we have other financing alternatives to explore.
"We are a profitable company with a strong cash position, ample levels of capital at our regulated subsidiaries, and profitable and growing specialty businesses, and we remain in compliance with all of our existing bank covenants," Phanstiel continued.
"While working to stabilize our profitability as we manage the transition from capitated to risk-based contracting, we have also been laying the groundwork to launch our new Medicare Supplement and PPO products," he added.
"Earlier this month, we received state regulatory approval to market our new Secure Horizons Medicare Supplement plans in California and Arizona, and plan to begin enrolling members in September. We also anticipate receiving approvals over the coming months in all the states where we plan to offer our Medicare Supplement and PPO product lines in 2002.
"The launch of our Medicare Supplement and PPO initiatives are key milestones in what is likely to be a two-year turnaround process for the company," Phanstiel said.
Conference Call, Webcast and Web Site Information
PacifiCare will host a conference call and webcast on Wednesday, Aug. 1, at 12 noon (EDT), 9 a.m. (PDT), to discuss this release in further detail. Investors, analysts and other interested parties will be able to access the live conference by dialing 888/625-1617. The password is PacifiCare and the conference leader is Howard Phanstiel. A live webcast of the call will be available at www.pacificare.com.
Click on About the Company, Investor Relations, and Conference Calls to access the link. Additionally, a replay of the call will be available until the end of day Aug. 22, at 800/925-1765. Second Quarter 2001 supplemental tables are also available on the company's Web site, or by calling investor relations at 714/825-5489.
Dedicated to making people's lives better, PacifiCare Health Systems is one of the nation's largest health care services companies. Primary operations include managed care products for employer groups and Medicare beneficiaries in eight Western states and Guam serving 3.6 million members.
Other specialty products and operations include pharmacy benefit management, behavioral health services, life and health insurance, and dental and vision services. More information on PacifiCare Health Systems can be obtained at www.pacificare.com or by calling 877/PHS-STOCK (877/747-7862).
Risk Factors Regarding Forward-Looking Statements. The statements made by Howard Phanstiel and Gregory Scott in the above news release and other statements that are not historical facts are forward-looking statements within the meaning of federal securities laws, and may involve a number of risks and uncertainties.
Such forward-looking statements include, but are not limited to, those relating to strategies to stabilize the company's profitability, the pace of conversion to risk-based provider contracting and the effect of a conversion slowdown on stabilizing health care costs, expected commercial premium rate increases, contract renewals and re-contracting actions, increased claims handling ability and process improvements to further reduce claims inventories, building the infrastructure needed to expand the company's health insurance portfolio to include Preferred Provider Organization, Medicare Supplement and other health-care related products and services, expectations regarding debt refinancing, the assessment of the company's cash position and capital and the ability to execute on the turnaround strategy.
Important factors that could cause results to differ materially from those expected by management include, but are not limited to, failure to implement programs to stabilize profitability, loss of membership or inability to achieve expected membership targets as a result of increased premiums or benefit adjustments, inability to continue current or implement planned cost control strategies such as medical and disease management programs, actual medical claims results differing from current estimates, inability to accurately predict conversion to risk-based provider contracting, inability to maintain required capital levels at the company's regulated subsidiaries, inability to maintain profitability and growth at the company's specialty businesses, provider financial problems or bankruptcy, unexpected increases in competition, new regulations or laws relating to capitation, Medicare reimbursements, benefit mandates, service, utilization management, provider contracts and similar matters, inability of proposed new portfolio offerings to improve membership and profitability, and inability to comply with existing bank covenants. In addition, the company's ability to continue to execute its turnaround strategy depends upon the refinancing or extension of its credit facility maturing in January 2002 and the company cannot be certain that it will complete a refinancing or extension or do so on favorable terms. |
