PacifiCare Plans 250 Layoffs in Bid to Cut Costs

PacifiCare Health Systems Inc., which operates the nation’s largest managed-care plan for people on Medicare, said Wednesday that it will lay off 250 people--about 3% of its work force--over the next year as it strives to cut costs and improve efficiency.

An additional 200 positions will be lost through attrition. The total reduction, spread throughout PacifiCare’s national operations, includes 120 to 150 jobs in California through layoffs and attrition combined, company spokeswoman Lisa Boyette said.

The cost-cutting measure is yet another example of turmoil at the Santa Ana health maintenance organization, which has been hard hit by changes in the managed-care industry, as well as by its own financial woes.

Last fall, PacifiCare’s chief financial officer left the company, citing differences with top management over a recovery plan, and shortly thereafter the company restructured its executive ranks, demoting chairman and chief executive Alan Hoops to president and chief executive, and made other changes.

The reshuffling, ongoing since September, is part of the company’s efforts to right itself after a variety of financial stresses, from cuts in Medicare reimbursement for its 1-million member Secure Horizons program to the decline of the very model on which it has structured its business.

Over the past year, the so-called capitated model of managed care, in which a health plan pays doctors a set fee each month no matter how much it costs to take care of patients, has declined rapidly. That has forced PacifiCare to pay more for the services that members receive.

The work-force cuts announced Wednesday will be implemented in stages, Boyette said. About 90 employees are being sent home immediately and 160 more will be phased out over the next year.

Exactly how many employees will leave the company, though, is uncertain because PacifiCare still has to fill about 600 vacant jobs and will give laid-off employees a chance to apply for those positions, Boyette said.

The company would not say where the cuts would be made or how many laid-off employees might qualify for the open jobs. Those who leave, she said, will be provided job counseling and severance pay.

Boyette would not say how many employees in Orange County would lose their jobs, but about 4,100 of the company’s 8,300 employees work out of offices in Santa Ana and Cypress.

At corporate headquarters in Santa Ana, the company has 1,150 employees in executive, finance, human resources, regulatory affairs and public affairs divisions.

In Cypress, 2,950 employees run the PacifiCare of California health plan, handling member services, sales and marketing, and other functions for the state’s 1.7 million commercial members and 600,000 Medicare members.

Overall, the company operates HMOs and other managed-care plans for 3.7 million members in nine states and Guam.

As a result of the layoffs and other changes, PacifiCare said it will take a restructuring charge of $7 million to $8 million in the first quarter.

Wall Street wasn’t surprised by news of the layoffs. The stock fell $1.44 a share to close at $50.06 in Nasdaq trading.

The job cuts, made just three weeks before the company is set to release its 1999 financial results, are part of an ongoing effort by PacifiCare to woo back investors through reorganization and optimistic projections of future earnings.

The company, which lost money in 1997 and made only a slim profit in 1998, has been struggling to improve the price of its stock. The stock lost two-thirds of its value over the summer and early fall, hitting a 12-month low of $32.50 a share in October.

After the management reshuffling and a plan to buy back stock, shares are still trading at less than half the 12-month peak of $100.38 in May.

Sheryl R. Skolnick, a health care industry analyst with Banc Boston Robertson Stephens, said Wall Street will welcome any cost savings. But, she said, there is concern about whether the company will be able to operate effectively with fewer employees.

For example, Skolnick said, PacifiCare is “notoriously slow� in paying claims, and cuts in the administrative ranks could make the company even slower.

“I would be concerned about what functions might be affected by the cuts and if the company will be able to operate effectively,� she said. “If they eliminate people in marketing, then how are they going to grow? If it’s the people who process claims, then it makes me wonder how they will execute paying claims and keeping providers in line.�

Along with the layoffs, rumors resurfaced Wednesday that Pacificare is attempting to ready itself for sale to another company. But analysts discounted that idea, saying Pacificare would not be attractive to buyers at its current share price.

Rumors of a sale “have been around for years,� said Jason I. Fox, an analyst with Olde Discount Corp. in Detroit. “Lord knows why they are surfacing with this [layoff]. This is a stand-alone event in our opinion.�

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Slumping Stock

PacifiCare Health System’s shares have lost about half their value over the last six months.

Weekly prices:

Jun. 4, 1999: $91.50

Jan. 12, 2000: $50.06

Source: Bloomberg News