Howard G. Phanstiel

Chairman, president, and chief executive officer, PacifiCare Health Systems

Nationality: American.

Education: Syracuse University, BS; Maxwell School of Public Administration, Syracuse University, master's degree.

Family: Married Louise (maiden name unknown).

Career: Illinois Bureau of Budget, Office of Fiscal Affairs, division chief; Wisconsin Bureau of Planning and Budget, executive budget officer; U.S. Department of Health, Education, and Welfare, Office of Management and Budget and the Health Care Financing Administration, director; Prudential Bache International Bank, Prudential Bache Securities, Marine Midland Banks, Sallie Mae, Citibank, the Illinois Bureau of Budget, and the Wisconsin Bureau of Planning and Budget, executive and management positions; WellPoint Health Networks, executive vice president, finance and information services; ARV Assisted Living, chairman and chief executive officer; PacifiCare Health Systems, 2000, executive vice president and chief financial officer; 2000–2004, president and chief executive officer; 2004–, chairman, president, and chief executive officer.

Awards: Recognized for significant achievements and contributions to the managed-care sector of Who's Who in Managed Care; honored at the third annual American Heart Association Corazones Unidos/Hearts United Gala for dedication and support provided to the Latino community.

Address: PacifiCare Health Systems, 5995 Plaza Drive, Cypress, California 90630; http://www.pacificare.com.

■ In 2000, just two weeks after California-based PacifiCare Health Systems, a managed-care company, issued a third-quarter profit warning of anticipated lower earnings and watched its stock value drop by half, its chief executive officer (CEO) said he was leaving the position. Robert O'Leary, who had held the job for only three months, was replaced on an interim basis by the former chief financial officer (CFO), Howard Phanstiel, who was also named to the board. O'Leary said the company's short- and long-term priorities had changed substantially from what he perceived when he took the job. His skills and background were not a good fit for a company that needed a leader well grounded in the fundamentals of managed care.

They found such a leader in Phanstiel, whose background in financial management, information technology, and managed care made him a perfect replacement for O'Leary. Phanstiel had joined PacifiCare as executive vice president and CFO in July 2000. As CFO, Phanstiel was responsible for the company's corporate finance and accounting, treasury, and investor-relations departments. In October 2000 the company's board of directors appointed him to be president and CEO; he was also named to the board of directors. In 2004 he was elected chairman of the board.

Phanstiel had solid health-care and management experience prior to joining PacifiCare. He had been chairman and CEO of ARV Assisted Living of Costa Mesa, California, a $150 million company with 60 assisted-living communities nationwide serving eight thousand residents. He led ARV's expansion, acquiring 12 communities with two thousand residents, opening four new communities of six hundred residents, and reducing ongoing corporate overhead by 5 percent.

Before joining ARV, Phanstiel was executive vice president for finance and information services at Wellpoint Health Networks in Woodland Hills, California. He led efforts to complete Wellpoint's $3.5 billion recapitalization and acquire two major indemnity companies that doubled its membership and revenue. He also held various executive management positions with Prudential Bache International Bank and Prudential Bache Securities, Sallie Mae, and Citibank. Phanstiel also gained health-care and management experience in the public sector at both state and federal levels. He served as a director of the Health Care Financing Association of the U.S. Department of Management and Budget, division chief at the Office of Fiscal Affairs at the Illinois Bureau of Budget, and executive budget officer at the Wisconsin Bureau of Planning and Budget.

Phanstiel was well suited for the job at PacifiCare, the nation's largest health-maintenance organization (HMO), which was reeling financially when he took the reins. The company faced numerous problems, including shareholder and patient litigation, and Phanstiel acknowledged that he confronted "a couple of very tough years before we can get the company straightened out" (BusinessWeek online ). For example, the Texas attorney general's office was considering whether to demand that the company pay an estimated $100 million in past-due medical claims. If such litigation came to pass, the company would have had to divert money to create adequate cash reserves. Stock-market experts said that Phanstiel's main challenge was to reduce PacifiCare's reliance on Medicare for its revenues and draw commercial customers to its more profitable healthcare plans, including behavioral health, dental, and vision coverage.

As for the company's low earnings, PacifiCare attributed its shortfall to a jump in medical costs that forced it to curtail Medicare enrollment in some areas. The costs were driven higher, in part, by the ongoing conversion of fixed-payment (or capitated) hospital contracts to shared-risk contracts. Under the capitation system, managed-care companies pay a predetermined fee to hospitals and doctors regardless of the cost of the care. Under the shared-risk contract, the insurance companies pay fees after medical costs are incurred. Stock-market analysts claimed that PacifiCare was having difficulties in estimating the shared-risk costs as it was used to paying a fixed fee, and that the company then underestimated the medical-cost reimbursements. Higher medical costs were blamed for the bulk of its problems—conversion from capitation to shared-risk contracts ended up costing PacifiCare $70 million to $75 million more than expected.

The company, with its four million members in nine states, faced such problems as a consequence of its 1990s push into the Medicare market. The move, said one expert, had quadrupled the number of older members on PacifiCare's roster, but it also saddled the HMO giant with one million members on Medicare. Medical expenses for those patients rose 10 to 11 percent annually during this time, but premiums increased only about 2 percent, resulting in an earnings shortfall. To get a better handle on rising costs, Phanstiel had the company take several major steps, including new restructuring efforts and outsourcing its information technology. The moves were expected to save the company $90 million annually.

Phanstiel announced a strategy aimed at increasing earnings and shifting PacifiCare's reputation from an HMO-focused organization to a company that would focus on diversifying its services to its members. He expected to restore higher earnings, offer Medicare supplemental options, expand pharmacy benefit management, and delve into clinical drug trials. Phanstiel said in June 2002 that the company was about halfway through its turnaround plan. "From now on, it is a brand new day at PacifiCare," he told investors (Business Week online ). Phanstiel admitted that PacifiCare had made mistakes, particularly in Texas, but said it was correcting the problems; PacifiCare, he said, had been "a bit naïve" in not changing its business model (BusinessWeek online ).

Despite the steps taken to put PacifiCare on a better financial footing, Phanstiel faced major hurdles. For example, PacifiCare committed to supporting the federal government's effort to provide a comprehensive, affordable prescription-drug program for seniors. "As the most sweeping legislative reforms in the Medicare program's 38-year history come to fruition, we believe PacifiCare is well positioned as a leader in serving the health care and prescription drug needs of America's seniors," Phanstiel noted, adding that the company had the expertise and experience to provide affordable and flexible prescription benefits that seniors seek (BusinessWeek online ).

Phanstiel pointed specifically to the company's Medicare+Choice plans and its fee-for-service Prescription Advantages program. In 1985 PacifiCare's Secure Horizons became one of the first Medicare health plans to be awarded a Medicare+Choice contract by the federal government. In 2004 Secure Horizons reached some 700,000 members through its Medicare+Choice, Medicare Supplement, and drug-benefit programs and its caregiver services. Seniors need prescription drug options, he said, and the private sector can offer Medicare beneficiaries more options and flexibility.

Despite being somewhat dependent on future government actions, Phanstiel saw cause for optimism, but he also saw a "potential gathering storm ahead for managed care." He felt that his job was "to set the course, batten down the hatches, so PacifiCare can outrun the storm." He saw the managed-care industry facing pressure from decreasing bed capacity nationwide and rising pharmaceutical costs. The industry also had to grapple with "adverse selection," in which members who use more health-care services enroll in HMOs, which can drive up costs for health-care plans (Hoover's Online ).

On the positive side, Phanstiel felt that new legislation overhauling Medicare would pump money into the healthcare system. Further, the U.S. Supreme Court had effectively capped excessive damage awards, while consumer-directed health plans and lower-cost HMOs seemed to be gaining wider acceptance. Also, employers were increasingly willing to pay for preventative-care and disease-management programs, and there had been some shift back from employer-funded insurance to managed-care plans.

Phanstiel said that PacifiCare would try to focus on its successful businesses while building complementary businesses, such as pharmacy benefit-management services. The company aimed to aggressively manage its administrative costs and make incremental technology investments. With health-plan members sharing more premium costs, PacifiCare hoped to build a leading consumer brand, with a focus on customer service. Under Phanstiel's experienced leadership, PacifiCare transformed itself into a leading consumer-health organization offering a variety of consumer-driven programs that aimed to provide more affordable and flexible health insurance and related products.

See also entry on PacifiCare Health Systems, Inc. in International Directory of Company Histories.

sources for further information

Grover, Ronald, "This HMO Needs Resuscitating: Low Premiums from Medicare have Pacificare on Life Support," BusinessWeek online, http://www.businessweek.com/bwdaily/dnflash/dec2002/nf2002126_5895.htm.

"PacifiCare CEO Optimistic Despite Industry Woes," press release, June 11, 2004.

"PacifiCare Expects to Participate in New Medicare Prescription Drug Program," Assisted Living Success, http://www.alsuccess.com/hotnews/37h248573.html.

"PacifiCare Health Systems, Inc.," Hoover's Online, http://www.hoovers.com/subscribe/co/, June 15, 2004.

Weintraub, Arlene, "PacifiCare's Iffy Prognosis," BusinessWeek online, http://www.businessweek.com/bwdaily/dnflash/dec2002/nf2002126_5895.htm.

—Peter Collins