PacifiCare CEO’s Resignation Set for 2001

Capping a six-month period of turmoil at the nation’s largest Medicare health maintenance organization, PacifiCare Health Systems Inc. Chief Executive Alan R. Hoops on Thursday announced plans to retire by spring 2001.

The retirement, which Hoops described as “not a tough decision� for either himself or the board, comes after a two-year pummeling of PacifiCare’s stock and the disenchantment of Wall Street with key elements of the 4-million member health plan’s business model.

Changing that perspective, he said, is a long-term job best left for a wholly new management team.

“I’ve been with PacifiCare for about 20 years, and I’ve been CEO for about eight and have essentially completed what I want to do . . . which was to create a $10-billion company and create what I thought would be a lasting franchise,� Hoops said. During his tenure, the Costa Mesa company also became the nation’s largest HMO for seniors through its Secure Horizons plan, which has 1.1 million members.

Hoops’ departure will leave three of the company’s top positions open, giving the board opportunity to name new leadership.

Over the past six months, PacifiCare has lost its chief financial officer, demoted its chief operating officer and now will lose Hoops, who was himself stripped of the chairman title last fall. At the same time company management embarked on a plan to expand its non-Medicare businesses and laid off hundreds of workers in California and other states.

All the while, the company has managed to improve its bottom line, posting earnings of $66.4 million, or $1.59 per share for the fourth quarter, up 35% over the previous year. The per-share results beat analysts’ estimates of $1.52. Revenue rose 9.4% to $2.56 billion from $2.34 billion.

The company, which recovered from losses in 1997, reported $278.5 million in net income last year, up significantly from $202.4 million the previous year. Annual revenue rose to $10 billion from $9.5 billion.

That the financial turnaround has not translated into a higher stock price has been a source of frustration for Hoops, and a point of contention between the management team and some members of the company’s board.

The reasons lie in two key areas of the company’s business. Investors are wary of PacifiCare’s continued involvement in the Medicare business after the federal government reduced funding for the program, which serves the elderly.

In addition, PacifiCare continues to cling to a method of paying doctors called capitation, in which providers receive a set monthly fee to pay for all aspects of patient care. Capitation is believed to be at the root of many of the financial problems facing medical groups and hospitals.

According to sources close to the company, a struggle has been going on for months between those who wish to see PacifiCare continue on its current path as an HMO heavily reliant on Medicare business, and those who want to maximize shareholder value by selling the company or expanding into other lines of business.

As a further sign of disagreement among top executives and shareholders, Jack Anderson, the influential board member who had publicly urged last fall that the company be sold, has stepped down from the executive committee, Hoops said.

The transition to a new chief executive promises to be an orderly one, said Todd Richter, industry analyst at Banc of America Securities.

The announcement that Hoops is staying on for up to a year, he said, signifies that while the board may have concurred that it was appropriate for Hoops to leave, the veteran manager was not shoved out.

Under those circumstances, Hoops’ planned retirement does not come as a surprise, Richter said.

“You’ve got one person on board saying, ‘Get out of Medicare,’ one person saying, ‘Stay with Medicare.’ . . . Some saying sell the company, some saying not to sell the company. At some point you throw up your hands and say it’s not fun anymore,� he said.

Retooling the business so that it survives the changes ravaging the managed-care industry and regains favor among investors is a long process, Hoops said.

“Whoever does it really needs to have that long-term energy,� he said. “And I don’t think that I will have that long-term energy.�

On Thursday, PacifiCare stock fell 6 cents to close at $43.75 on Nasdaq.

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Market Swings

The shifting price for PacifiCare Health Systems Inc. stock, along with directors keeping an eye on shareholder returns, may have helped persuade Alan Hoops to retire as chief executive. The quarterly highs and lows under Hoops:

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Quarter High Date Low Date 1993 1st Qtr $49.00 2/4 $20.63 2/22 2nd Qtr 40.00 5/19 28.63 4/15 3rd Qtr 40.75 7/14 29.50 9/8 4th Qtr 41.50 12/8 29.88 11/2 1994 1st Qtr 56.38 2/16 37.75 1/3 2nd Qtr 59.50 6/6 47.50 4/4 3rd Qtr 75.00 9/30 46.00 7/6 4th Qtr 73.75 10/3 62.25 12/9 1995 1st Qtr 75.25 3/30 62.88 1/5 2nd Qtr 74.75 4/18 48.75 6/28 3rd Qtr 67.75 9/28 49.75 7/7 4th Qtr 89.00 12/22 66.50 10/2 1996 1st Qtr 96.50 3/7 78.75 3/27 2nd Qtr 83.00 6/3 66.00 6/28 3rd Qtr 84.25 9/18 60.00 7/19 4th Qtr 85.25 12/5 64.13 10/30 1997 1st Qtr 85.00 3/10 69.22 2/5 2nd Qtr 82.00 6/12 59.38 6/27 3rd Qtr 70.50 9/15 60.75 7/11 4th Qtr 70.13 11/10 49.88 12/29 1998 1st Qtr 74.00 3/31 47.88 1/9 2nd Qtr 85.88 6/29 68.38 4/27 3rd Qtr 87.38 7/7 55.88 9/3 4th Qtr 77.00 11/5 56.25 10/8 1999 1st Qtr 74.50 1/6 58.88 2/17 2nd Qtr 92.00 5/5 56.00 4/8 3rd Qtr 70.13 7/1 43.25 9/30 4th Qtr 54.19 11/4 32.50 10/21 2000 1st Qtr* 51.50 1/11 41.63 1/25

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* Through Feb. 10.

Source: Bloomberg News