The Medicare market is supposed to be a terrible business for health maintenance organizations, with many pulling out of it entirely because the federal government has lowered reimbursements for Medicare patients. But if that’s the case, how to explain the success of PacifiCare Health Systems Inc.?

Like most publicly traded health care companies, PacifiCare’s stock took a beating in late summer. But then something odd happened it early November: PacifiCare, the nation’s largest provider of Medicare managed care, released earnings results that far outpaced analysts’ expectations, resulting in a resurgence for its stock.

It has gone from a low of $59 in late October to around $81 last week.

For the third quarter ended Sept. 30, net income was $53.2 million ($1.16 per share), compared with $30 million (67 cents) for the like period a year ago. Revenues were $2.4 billion, flat with the year-ago period.

Analysts generally had not expected PacifiCare to do that well, especially because it depends so heavily on its Medicare members.

“PacifiCare anticipated the problems in the market, where the others didn’t,” said Joseph France, director of research for Credit Suisse First Boston in New York. “That is why they have been so successful. They have a lot of experience with the Medicare population and know how to be profitable in that environment.”

Santa Ana-based PacifiCare has been diligent about renegotiating contracts with providers to maximize Medicare profits. The company has also reduced staffing and reorganized its administrative operations to reduce unnecessary waste, according to company officials and analysts.

Medicare was not the only reason analysts were wary. In February 1997, it acquired failing FHP International for $2.3 billion, and then suffered huge losses in an effort to turn around the troubled acquisition.

For the year ended Dec. 31, 1997, PacifiCare reported a loss of $21.7 million (75 cents per share), compared with net income of $75.7 million ($2.39) in 1996. Revenues were $8.9 billion vs. $4.8 billion.

Brad Bowlus, president and chief executive of PacifiCare of California, a wholly owned subsidiary of PacifiCare, said turning around FHP’s money-losing operations, combined with fees associated with the merger, cost PacifiCare about $129 million.

In addition to California, FHP had operations in Utah, Nevada and Oregon all were losing money. The Utah operation was sold in September and the Nevada and Oregon operations are breaking even. The company also renegotiated contracts with providers and increased premiums in those areas.

“There were some difficulties with the FHP acquisition, but it was not a mistake for the company,” said Bowlus. “In retrospect, it was probably one of the best things we have done as an organization. It increased our market share in California and gave us a much broader reach.”

So broad, in fact, that there have been rumors in recent weeks that PacifiCare itself might be a takeover target.

“There is a lot of speculation,” said France. “They are a very attractive candidate to another big company that wants to increase its market share in California.”

Bowlus said the company does not comment on rumors and speculation, but noted that PacifiCare has not “fully realized its growth potential.” He did concede that the health care industry likely will go through more consolidation.

Edward Keaney, managing director of Volpe Brown Whelan & Co., projected that PacifiCare will fare well in the future, but noted that there is still some risk for investors in any company that is connected to the heavily regulated Medicare industry.

“There is still uncertainty in Medicare that investors have to live with in the market,” he said. “Medicare is a moving target. That is still an obstacle for PacifiCare.”

Despite his reservations, Keaney forecasts a jump in net income for year-end 1998 to $209 million ($4.54 per share).

Mike LeConey, director of health care research for Security Capital Trading in New York, said if any company survives in the Medicare market, it will be PacifiCare.

“There is only one company that is great in dealing with the Medicare business, and that is PacifiCare,” said LeConey. “I think PacifiCare will continue to surprise people and prosper.”