PacifiCare to Pay Penalties for Late Claims Payments to Doctors, Hospitals

PacifiCare Health Systems Inc., acknowledging that it has been delinquent in paying thousands of insurance claims filed by doctors and hospitals, said Thursday that it reached an agreement with state regulators to pay penalties and interest on the claims.

The Santa Ana managed-care company disclosed the agreement after concerned analysts had issued warnings about a state crackdown on the delinquent payments, sending PacifiCare’s stock into a tailspin. PacifiCare would not disclose the size of the penalties, saying only that they are less than $3 million.

The shares slumped 21%, or $8.22, to $30.91 in heavy Nasdaq trading. The stock was off as much as 30% earlier in the session.

PacifiCare said it has 7,000 claims that it failed to pay within the 45 working days required by state law.

In issuing their warnings earlier in the day, analysts said the company’s failure to pay claims on time raises concerns about its ability to meet profit targets.

“It raises questions about costs, and it also raises questions about how well they can underwrite and price their business if they haven’t been paying their claims,” said Merrill Lynch & Co. analyst Roberta Goodman, who has a “near-term neutral” rating on the stock.

The crackdown against PacifiCare by the state’s Department of Managed Care is an outgrowth of a backlog of payments by several HMOs, creating financial headaches for hospitals, physicians and other health-care providers.

The department issued a cease-and-desist order against PacifiCare on Feb. 8 after discovering the delinquent payments.

Other HMOs may face similar sanctions, said Daniel Zingale, the department’s director. “This problem clearly goes beyond PacifiCare,” he said.

Slow payments are “a threat to the quality of health care,” Zingale said. In one fallout, some emergency-room doctors are refusing to be on call because they are either being paid late or not at all, he said.

PacifiCare is far from the only HMO making late payments, said Jan Emerson, spokeswoman for the California Healthcare Assn., a Sacramento-based advocacy group that represents the state’s hospitals.

In a survey last year, 85 of California’s 450 hospitals said they were owed $1 billion in overdue claims payments, she said.

Late payments put a strain on California’s already stretched hospital system, which largely operates in the red. Since 1995, 34 hospitals have closed their doors, including eight last year, Emerson said.

“Hopefully, this action against PacifiCare will be a significant statement to the health-care industry,” she said.

PacifiCare said it expects to pay the penalties, interest and delinquent claims by the end of the month and is working to correct problems with its processing system. The company said it has adequate reserves to cover the claims.

Because the penalties related to the claims don’t exceed $3 million, they are “immaterial to our business this year,” the company said in a news release.

“We believe we’re taking all the steps appropriate to deal with this,” spokesman Ben Singer said.

PacifiCare has hired 72 claims processors and upgraded its information systems to expedite the payment of claims, the company said.

The company said its late payments stem from its shift from paying medical providers a fixed amount per patient regardless of attention needed to a system of paying for actual service rendered.

However, PacifiCare’s difficult transition from a fixed-payment model to so-called shared-risk contracts raises another concern, said Peter Costa, an analyst with ABN Amro Chicago Corp. “If you’re not paying your claims on time, you might not have a good handle on what your costs are,” he said.

Charles Boorady, a Goldman, Sachs & Co. analyst, said the claims problem raises questions about the adequacy of PacifiCare’s reserves and comes as the company is trying to refinance bank debt. He rates the stock “market perform.”

The company also faced regulatory action in Texas after doctors and hospitals complained of slow payments. PacifiCare’s problems with Texas regulators have been resolved, spokesman Dan Miller said.

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Bloomberg News was used in compiling this report.