Storm on the Horizon?

The chief executive of PacifiCare Health Systems Inc. has warned that runaway healthcare costs and a shrinking hospital market could spell trouble for the industry and the Cypress-based company.

"We're emerging from a new calm and moving into the next storm," Howard Phanstiel told analysts at a recent meeting in Laguna Beach. "My job is to set the course and batten down the hatches so PacifiCare can weather the storm and sail to a new day."

Health insurance premiums are far outstripping inflation and the growth in salaries for workers. Inflation is around 3 percent, and wages are up about 5 percent, but health premium growth is in the mid-teens.

Meanwhile, the shrinking hospital market could make it harder for PacifiCare to strike discounts in contract talks with hospital operators, Phanstiel said.

He noted that PacifiCare's key markets--California, Arizona, Colorado and Texas--have fewer hospital beds per 100,000 people than the national average.

On the plus side, Phanstiel cited higher federal reimbursements, renewed hospital interest in treating Medicare patients and the eventual launch of full prescription drug coverage. PacifiCare and other plan operators are set to get $14 billion in federal funding thanks to new Medicare legislation.

In the days after PacifiCare's investor conference, J.P. Morgan analyst Scott Fidel upgraded his rating on the company's shares to "neutral" from "underweight," primarily because of Medicare growth prospects.

The brokerage said that "as election-year noise subsides and seniors gain familiarity with the private-sector options," PacifiCare could reach its target of 787,000 members in its Secure Horizons Medicare plan by the end of 2005. As of May, PacifiCare had 688,137 Secure Horizons members.

As for rising healthcare costs, Phanstiel expects growing political pressure bearing down on drug makers.

"Congress has whacked every other major industry in health care--long-term care, hospitals, health insurers, docs, laboratories," Phanstiel said. "The only group that hasn't been whacked is Big Pharma."

--Orange County Business Journal