No. 8
Foundation Health Systems Inc.
Woodland Hills
Foundation Health Systems wound up high on the Business Journal list because of its phenomenal growth in the mid-1990s but 1997 was a different story.
The Woodland Hills-based company’s average five-year return on equity is a healthy 27.31 percent, based primarily on its income more than tripling between 1992 and 1996. Had it continued on that pace, it would be among the top three or four fastest growing public companies in L.A. County.
But it hit a speed bump in 1997, posting a loss of $187 million and generating a negative return on equity for the year.
It $2.2 billion stock-swap acquisition of Health Systems Inc. in April 1997 has been cited for the trouble. It incurred $396 million in one-time costs related to the deal.
Foundation also was hit with $23 million in settlement costs for past legal claims.
In addition, analysts said, Foundation’s workers’ compensation business contributed to the dip. In the fourth quarter of 1997, the line lost $56 million, or 46 cents per diluted share. Foundation is getting out of the workers’ compensation business, and those losses are now reported under “discontinued operations.”
Analysts said it might take about a year to get back on track.
“The company has good assets. It’s a profitable company,” said Todd Richter, an analyst with Morgan Stanley. “In the near term, the company is working on knitting itself together.”
A planned increase in health premiums will help fuel FHS’ growth, said Richter. “Pricing is a lot better than it was in ’95 and ’96. It will look even better in 1999,” he said.
Foundation is the nation’s fourth-largest public health maintenance organization. It provides managed health care services to more than 6 million members in 18 states, primarily in the West.
Total health-plan enrollment in 1997 rose 28 percent to 4.3 million, from 3.3 million the year before. The year-end results were aided by the inclusion of 715,000 members from Physicians Health Services, which agreed to be acquired by Foundation in 1997.
“The issue for (Foundation) is not survival, not profitability. The issue for them is growth,” said Richter. “I’m very comfortable with them.”
