PacifiCare Tries to Renegotiate Physicians’ Pacts : Earnings: Slimmer profit margins predicted for year by CEO. First-quarter net of $2.5 million compared to $2.9 million year earlier.

PacifiCare Health Systems Inc. reported first-quarter earnings of $2.5 million and said it is trying to renegotiate lower-cost contracts with physicians and hospitals because of the lack of a Medicare rate increase this year.

Wayne B. Lowell, chief financial officer of the Cypress-based health maintenance organization, said the company’s profit margins will be slimmer this year because of the flat Medicare payments.

“We are in contract negotiations to protect some of our margins,” Lowell told a group of 25 analysts who participated in a nationwide conference call following the company’s release of its first-quarter earnings.

The company reported net earnings of $2.5 million for the three months ended Dec. 31, down from $2.9 million in the same period a year ago. But the year-ago period included a one-time gain of $1 million for the sale of operations in Austin, Tex.

During a nearly hourlong presentation and question-and-answer session, Lowell said that the company’s first-quarter earnings were “a little better than expected” and that the company continues to predict about a 20% earnings growth for the current year.

Wall Street was little impressed. The company’s stock tumbled $4 to $19.25 in trading on the New York Stock Exchange.

Todd Richter, an analyst with Dean Witter Reynolds, said investors reacted negatively to news that the company’s first-quarter earnings were down 15%. But a closer look at operations indicates that the market was overreacting, he said.

For instance, PacifiCare’s operating revenue in the first quarter increased 37% to $279.19 million from $204.43 million for first three months of the last fiscal year.

Nonetheless, Lowell told analysts that PacifiCare has problems to confront, including the federal government’s tighter Medicare reimbursement policy and mounting competition from FHP International Corp. Fountain Valley-based FHP has pushed aggressively into San Diego, which is a major market for PacifiCare, and is offering more generous pharmaceutical benefits to seniors than its rivals. Lowell said that while PacifiCare is having some success in persuading doctors to lower their contract fee because of the Medicare reimbursement crunch, the company still expects that throughout the year “inflation will push Medicare costs above anticipated revenue.”

He also noted that PacifiCare medical costs spiraled in the first quarter. Not only were more people hospitalized for longer periods, but doctors dispensed more prescriptions for patients.

Lowell said the high rate of hospitalization in the first quarter was probably an aberration. And to control rising pharmaceutical costs, he said, the company is providing physicians incentives to write drug prescriptions with greater discretion.

Besides renegotiating with health-care providers, Lowell said PacifiCare this year is cutting back Medicare benefits by raising co-payments and eliminating certain long-term nursing care.

But he added that to compete with FHP in the Southern California market, PacifiCare is being forced to expand the pharmaceutical benefits it offers to seniors through its Medicare HMO called Secure Horizons. Moreover, he said that PacifiCare, following FHP’s lead, is planning soon to establish its own pharmacy service, starting in San Diego where FHP recently began marketing its Medicare HMO.

PACIFICARE’S PERFORMANCE

PacifiCare Health Systems Inc. posted earnings of $2.5 million for its first fiscal quarter ended Dec. 31, which was in line with the company’s growth projections. The Cypress-based HMO had higher earnings of $2.9 million in the same three months of its 1990 fiscal year, but that included about a $1-million one-time gain from the sale of operations in Austin, Tex.

Dollars in thousands, except per-share

Percent 1990 1989 Change Total revenue $279,190 $204,427 37% Net earnings $2,509 $2,945 -15% Earnings per share $.21 $.25 -16%

Source: J.M. Peters Co.