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PACIFICARE HEALTH SYSTEMS INC /DE/
10-Q, 2000-11-13
HOSPITAL & MEDICAL SERVICE PLANS

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UNITED STATES

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(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2000

OR

[   ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-21949

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PACIFICARE HEALTH SYSTEMS, INC.

Delaware		95-4591529
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)

3120 Lake Center Drive, Santa Ana, California 92704

(714) 825-5200

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

There were approximately 34,164,000 shares of common stock outstanding on October 31, 2000.

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PACIFICARE HEALTH SYSTEMS, INC.

FORM 10-Q

				Page
PART I. FINANCIAL INFORMATION
Item  1.		Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999			1
		Condensed Consolidated Statements of Operations for the three months ended September 30, 2000 and 1999			2
		Condensed Consolidated Statements of Operations for the nine months ended September 30, 2000 and 1999			3
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2000 and 1999			4
		Notes to Condensed Consolidated Financial Statements			6
Item  2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			17
Item  3.		Quantitative and Qualitative Disclosures About Market Risk			29
PART II. OTHER INFORMATION
Item  1.		Legal Proceedings			30
Item  5.		Other Information			30
Item  6.		Exhibits and Reports on Form 8-K			30
Signatures					31
Exhibits					32

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PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

PACIFICARE HEALTH SYSTEMS, INC.

				September 30,				December 31,
				2000				1999
				(unaudited)
ASSETS
Current assets:
	Cash and equivalents			$	489,418			$	849,064
	Marketable securities				925,725				999,194
	Receivables, net				391,853				306,652
	Prepaid expenses and other current assets				42,204				48,412
	Deferred income taxes				152,033				141,169
		Total current assets			2,001,233				2,344,491
Property, plant and equipment at cost, net					211,217				177,521
Marketable securities-restricted					92,818				86,471
Goodwill and intangible assets, net					2,283,820				2,244,243
Other assets					35,102				31,295
				$	4,624,190			$	4,884,021
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
	Medical claims and benefits payable			$	1,143,700			$	795,200
	Accounts payable and accrued liabilities				420,947				425,171
	Unearned premium revenue				64,904				565,815
	Long-term debt due within one year				151				—
		Total current liabilities			1,629,702				1,786,186
Long-term debt due after one year					836,460				975,000
Deferred income taxes					141,284				127,469
Other liabilities					20,792				17,314
Minority interest					1,938				333
Stockholders’ equity:
	Common stock, $.01 par value; 200,000 shares authorized; issued 46,941 shares in 2000 and 46,803 shares in  1999.				469				468
	Additional paid-in capital				1,616,273				1,597,485
	Accumulated other comprehensive loss				(14,413	)			(24,396	)
	Retained earnings				1,077,198				928,152
	Treasury stock, at cost; 12,779 shares in 2000 and 9,551 shares in 1999				(685,513	)			(523,990	)
		Total stockholders’ equity			1,994,014				1,977,719
				$	4,624,190			$	4,884,021

See accompanying notes.

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PACIFICARE HEALTH SYSTEMS, INC.

				Three Months Ended
				September 30,
				2000				1999
Revenue:
	Medicare premiums			$	1,591,062			$	1,479,811
	Commercial premiums				1,242,677				1,007,721
	Other income				34,182				30,385
		Total operating revenue			2,867,921				2,517,917
Expenses:
Health care services:
	Medicare services				1,448,333				1,292,320
	Commercial services				1,092,366				815,378
		Total health care services			2,540,699				2,107,698
Marketing, general and administrative expenses					303,043				280,867
Amortization of goodwill and intangible assets					20,938				18,849
Impairment, disposition, restructuring and other charges (credits)					(6,821	)			(2,233	)
Operating income					10,062				112,736
Net investment income					28,443				20,304
Interest expense					(19,252	)			(9,742	)
Minority interest in consolidated subsidiary					252				—
Income before income taxes					19,505				123,298
Provision for income taxes					14,286				54,041
Net income				$	5,219			$	69,257
Basic earnings per share				$	0.15			$	1.54
Diluted earnings per share				$	0.15			$	1.54

See accompanying notes.

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PACIFICARE HEALTH SYSTEMS, INC.

				Nine Months Ended
				September 30,
				2000				1999
Revenue:
	Medicare premiums			$	4,762,494			$	4,370,090
	Commercial premiums				3,658,663				2,967,821
	Other income				103,610				86,662
		Total operating revenue			8,524,767				7,424,573
Expenses:
Health care services:
	Medicare services				4,230,991				3,813,213
	Commercial services				3,085,348				2,411,868
		Total health care services			7,316,339				6,225,081
Marketing, general and administrative expenses					899,551				809,079
Amortization of goodwill and intangible assets					62,321				56,717
Impairment, disposition, restructuring and other charges (credits)					1,544				(2,233	)
Office of Personnel Management credits					(2,964	)			—
Operating income					247,976				335,929
Net investment income					77,955				60,747
Interest expense					(59,684	)			(29,547	)
Minority interest in consolidated subsidiary					383				—
Income before income taxes					266,630				367,129
Provision for income taxes					117,584				154,987
Net income				$	149,046			$	212,142
Basic earnings per share				$	4.21			$	4.67
Diluted earnings per share				$	4.18			$	4.64

See accompanying notes.

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PACIFICARE HEALTH SYSTEMS, INC.

						Nine Months Ended
						September 30,
						2000				1999
Operating activities:
	Net income					$	149,046			$	212,142
	Adjustments to reconcile net income to net cash flows provided by (used in) operating activities:
		Amortization of goodwill and intangible assets					62,321				56,717
		Depreciation and amortization					33,727				31,011
		Loss on disposal of property, plant and equipment					4,857				6,406
		Provision for doubtful accounts					4,732				294
		Deferred income taxes					(3,588	)			38,803
		Office of Personnel Management credits					(2,964	)			—
		Tax benefit realized upon exercise of stock options					1,664				4,943
		Impairment, disposition, restructuring and other charges (credits)					1,544				(2,233	)
		Minority interest in consolidated subsidiary					(383	)			(22	)
		Changes in assets and liabilities, net of effects from acquisitions:
			Receivables, net				(71,426	)			(26,809	)
			Prepaid expenses and other assets				3,356				(13,709	)
			Medical claims and benefits payable				244,486				106,955
			Accounts payable and accrued liabilities				(15,154	)			(38,234	)
			Unearned premium revenue				(507,158	)			(454,735	)
				Net cash flows used in operating activities			(94,940	)			(78,471	)
Investing activities:
	Sale (purchase) of marketable securities, net						97,473				(189,197	)
	Purchase of property, plant and equipment						(73,934	)			(48,049	)
	Purchase of marketable securities-restricted						(6,076	)			(4,360	)
	Net cash acquired from (paid for) acquisitions						4,745				(18,581	)
	Proceeds from the sale of property, plant and equipment						3,034				13,198
				Net cash flows provided by (used in) investing activities			25,242				(246,989	)
Financing activities:
	Principal payments on long-term debt						(400,198	)			(75,093	)
	Proceeds from borrowings of long-term debt						261,809				50,000
	Common stock repurchases						(161,774	)			(158,203	)
	Cash received from minority stockholders						8,108				—
	Proceeds from issuance of common stock and treasury stock						2,107				22,594
	Common stock reclassification payments to UniHealth Foundation						—				(61,881	)
				Net cash flows used in financing activities			(289,948	)			(222,583	)
Net decrease in cash and equivalents							(359,646	)			(548,043	)
Beginning cash and equivalents							849,064				724,636
Ending cash and equivalents						$	489,418			$	176,593

See accompanying notes.

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PACIFICARE HEALTH SYSTEMS, INC.

				Nine Months Ended
				September 30,
				2000				1999
Supplemental cash flow information:
	Cash paid during the year for:
		Income taxes, net of refunds		$	119,003			$	156,367
		Interest		$	61,307			$	28,935
Supplemental schedule of noncash investing and financing activities:
	Stock-based compensation			$	9,149			$	7,226
Details of accumulated other comprehensive income (loss):
	Change in marketable securities			$	16,522			$	(41,471	)
	Less change in deferred income taxes				(6,539	)			14,609
	Change in stockholders’ equity			$	9,983			$	(26,862	)
Details of businesses acquired in purchase transactions:
	Fair value of assets acquired			$	264,284			$	18,581
	Less liabilities assumed or created				(135,238	)			—
	Cash paid for fair value of assets acquired				129,046				18,581
	Less cash acquired from acquisitions				(133,791	)			—
		Net cash (acquired from) paid for fair value of assets acquired		$	(4,745	)		$	18,581

See accompanying notes.

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PACIFICARE HEALTH SYSTEMS, INC.

1. Basis of Presentation

Organization. PacifiCare Health Systems, Inc. is one of the nation’s largest health care services companies, serving approximately 4 million members in the Medicare and commercial lines of business. Following the rules and regulations of the Securities and Exchange Commission (“SEC”), we omit footnote disclosures that would substantially duplicate the disclosures contained in the annual audited financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and the notes included in our December 31, 1999 Annual Report on Form 10-K, filed with the SEC in March 2000.

Quarterly Unaudited Information. The accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, needed to present fairly the financial results for these interim periods. The consolidated results of operations presented for the interim periods are not necessarily indicative of the results for a full year.

Use of Estimates for Health Care Costs. In the third quarter 2000, we received additional claims information relating to new shared-risk provider contracts. Our year-to-date experience indicates that daily hospital costs under the new shared-risk arrangements are generally consistent with expectations. However, member utilization is considerably higher than in calendar year 1999. The number of members covered by shared-risk hospital contracts has increased from more than 800,000 on December 31, 1999 to approximately 2 million as of September 30, 2000. The combination of these factors more than offset the ability of our increased medical staffing in 2000 to manage health care costs.

This claims information impacted our medical claims and benefits payable estimates. Third quarter health care costs include $24 million of changes in estimates for shared-risk claims incurred but not reported, relating to the first and second quarters of 2000.

Reclassifications. We made certain reclassifications to prior period amounts to conform to the current year presentation.

2. Acquisitions and Dispositions

2000 Acquisitions. On February 1, 2000, we completed our acquisition of Harris Methodist Texas Health Plan, Inc. and Harris Methodist Health Insurance Company, Inc. (together, “Harris”), a health plan and insurance company in Texas, for an approximate purchase price of $122 million. This acquisition added approximately 250,000 commercial members and 50,000 Medicare members to our Texas health maintenance organization (“HMO”) and was accounted for as a purchase. The related goodwill and acquired intangible assets are being amortized over periods ranging from three to 30 years. The operating results of these entities are included in our consolidated financial statements from the acquisition date.

During the first half of 2000, we assumed approximately 18,000 members in Colorado and approximately 21,000 members in Washington for a purchase price of approximately $6 million. These membership assumptions are the result of transition agreements signed with QualMed Plans for Health of Colorado, Inc. in September 1999 and with QualMed Washington Health Plans, Inc. in October 1999, each a subsidiary of Foundation Health Systems, Inc.

2000 Dispositions. In June 2000, we announced our intention to exit our Ohio HMO operations. This plan will affect approximately 42,400 commercial members and 4,700 Medicare members located in Ohio and Kentucky. We anticipate the exit will be completed by January 2001. We entered into an agreement with Anthem Blue Cross and Blue Shield to assist in transitioning Ohio’s commercial membership. Medicare members will have a choice of another Medicare+Choice HMO or traditional fee-for-service Medicare. In connection with the disposition, we recognized pretax charges of approximately $4 million

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($2 million or $0.07 diluted loss per share, net of tax). See Note 5 “Impairment, Disposition, Restructuring, Office of Personnel Management and Other Charges (Credits).”

1999 Acquisitions. In September 1999, we acquired ANTERO Health Plans in Colorado for a purchase price of $14 million. This acquisition added approximately 32,000 commercial members and 4,000 Medicare members to our Colorado HMO. In February 1999, we assumed approximately 15,000 commercial members in Texas for $4 million. These acquisitions were accounted for as purchases with substantially the entire purchase price allocated to goodwill and other acquired intangible assets. The goodwill and acquired intangible assets are being amortized over periods ranging from three to 20 years. The operating results of these entities are included in our consolidated financial statements from the acquisition date.

Pro Forma Financial Statements. The pro forma information below presents our consolidated results of operations as if the acquisition of Harris occurred at the beginning of each period presented. The pro forma information gives effect to actual results prior to the acquisition plus adjustments for depreciation expense, goodwill amortization, net investment income and income taxes. Because our 1999 membership acquisitions in Colorado and Texas as well as our 2000 membership assumptions in Colorado and Washington were not material to our consolidated results of operations, these transactions were not included in the pro forma information below.

		Three Months Ended				Nine Months Ended
		September 30,				September 30,
		1999				2000				1999
		(unaudited)
		(amounts in thousands, except per share data)
Total operating revenue		$	2,712,340			$	8,582,665			$	7,993,819
Income before income taxes		$	85,965			$	259,004			$	298,601
Net income		$	46,708			$	144,440			$	170,751
Basic earnings per share		$	1.04			$	4.08			$	3.75
Diluted earnings per share		$	1.04			$	4.05			$	3.73

3. Long-Term Debt

Beginning January 1, 1999, and continuing through the January 1, 2002 final maturity date, the amount available to be borrowed under our credit facility declines incrementally every six months. The next mandatory incremental reduction will occur on January 1, 2001. At that time the total amount available for borrowing will be $950 million. At September 30, 2000, we had an outstanding balance of $735 million. After the mandatory reduction, $215 million will be available for additional borrowings under the credit facility. The facility also requires mandatory step-down payments if the principal balance exceeds certain thresholds. Based on the September 30, 2000 balance, no payments are required until the final maturity date.

Interest under the credit facility is variable and is presently based on the London Interbank Offered Rate (“LIBOR”) plus a spread. Based on the outstanding balance at September 30, 2000, the average overall rate, excluding the facility fee, was 7.8 percent. The terms of the credit facility contain various covenants, usual for financings of this type, including a minimum net worth requirement, a minimum fixed charge requirement, leverage ratios and limits on the amount of stock we may repurchase. At September 30, 2000, we were in compliance with all such covenants. We also have $100 million in senior notes outstanding that we assumed when we acquired FHP International Corporation in 1997. These notes mature on September 15, 2003 and bear an interest rate of seven percent payable semiannually.

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During the quarter, we reduced our outstanding long-term debt by $35 million. This resulted in a debt to equity ratio of just under 30 percent.

4. Stockholders’ Equity

Minority Interest. In June 2000, PacifiCare and Compaq Computer Corporation (“Compaq”) agreed to jointly invest up to approximately $19 million in a newly formed Internet company for seniors called SeniorCo, Inc. PacifiCare has majority ownership of approximately 80 percent of the outstanding voting shares at September 30, 2000. We will contribute up to $5 million in cash ($3 million was contributed as of September 30, 2000), as well as certain assets, such as marketing support and management personnel. Compaq will contribute up to $14 million in cash ($8 million was contributed as of September 30, 2000). The operating results of this entity are included in our consolidated financial statements from the date of its formation, partially offset by the portion of operating results allocated to minority stockholders.

Stockholder Rights Agreement. In November 1999, our board of directors adopted a stockholder rights agreement to protect stockholder rights in the event of a proposed takeover. The board of directors declared a dividend of one right for each share of our common stock outstanding as of November 19, 1999. The right entitles the registered holder to purchase from PacifiCare   1/100 of a share of Series A junior participating preferred stock at a price of $180 per   1/100 of a preferred share. Similar rights will generally be issued in respect of common stock issued after November 19, 1999.

Treasury Stock. In October 1999, our board of directors approved a stock repurchase program that allows us to repurchase up to 12 million shares of our outstanding common stock, including any shares purchased from UniHealth Foundation, a non-profit public benefit corporation and our largest stockholder (see “UniHealth Foundation Stock Purchase Agreement” below). To purchase these shares, we negotiated an amendment to our existing credit facility that increases the maximum allowable amount of share repurchases to $1 billion from $500 million. We may fund the stock repurchase program through a combination of cash flows from operations, additional borrowings under the credit facility and long- and short-term debt. We have temporarily suspended the repurchase of our shares on the open market.

As of September 30, 2000, we held approximately 13 million treasury shares totaling $686 million. These shares were purchased pursuant to the October 1999 program discussed above and prior repurchase programs. We have reissued, and will continue to reissue these shares for our employee benefit plans or for other corporate purposes.

Reclassification of Common Stock. At our June 1999 annual meeting, our Class A and Class B common stockholders, including UniHealth Foundation, approved an amended and restated certificate of incorporation. The amended and restated certificate combined and reclassified our Class A and Class B common stock into a single class of voting common stock. The reclassified common stock has the same rights, powers and limitations as the previously existing Class A common stock. The reclassification of the Class A and Class B common stock had no impact on the total number of our issued and outstanding shares of common stock.

Prior to the combination and reclassification of our Class A and Class B common stock, UniHealth Foundation owned approximately 40 percent of our voting Class A common stock and approximately one percent of our non-voting Class B common stock. As of September 30, 2000, UniHealth Foundation owned approximately 16 percent of our outstanding voting common stock. In consideration for UniHealth Foundation’s vote in favor of the amended and restated certificate of incorporation, and in consideration of the agreements and covenants contained in the stock purchase agreement discussed below, we paid UniHealth Foundation $60 million in June 1999, when our stockholders approved the amended and restated certificate of incorporation. We also incurred $2 million of expenses related to the reclassification

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of our common stock and the registration of the shares held by UniHealth Foundation. These amounts were recorded as a reduction of stockholders’ equity in 1999.

UniHealth Foundation Stock Purchase Agreement. In May 1999, we entered into a stock purchase agreement with UniHealth Foundation to repurchase up to 5.9 million shares of our common stock held by UniHealth Foundation. The purchase price for the shares equals the average closing price of the stock for the 30 trading days preceding the scheduled purchase dates. We are not required to buy if the stock price is greater than $120 per share and UniHealth Foundation is not required to sell if the stock price is less than $75 per share. Depending on the average stock price determined as set forth above, we may repurchase UniHealth Foundation shares on the following dates and in the following installments:

															Aggregate
															Repurchase
							Per Share								Price Range
Approximate Purchase Date			Shares				Low				High				Low				High
															(amounts in
															millions)
August 9, 1999(1)				1,000,000			$	70			$	120			$	70			$	120
November 15, 1999(1)				1,000,000			$	75			$	120				75				120
February 15, 2000(1)				750,000			$	75			$	120				56				90
May 15, 2000(1)				750,000			$	75			$	120				56				90
August 15, 2000(2)				750,000			$	75			$	120				56				90
November 15, 2000				750,000			$	75			$	120				56				90
February 15, 2001				909,500			$	75			$	120				68				109
	Repurchase shares			5,909,500											$	437			$	709

(1)	We did not purchase the August 1999, November 1999, February 2000, or the May 2000 installments because the average stock price, as defined above, was less than $75 per share and UniHealth Foundation did not elect to sell the shares for the average stock price. For any unpurchased installments, we have no further obligation to buy, and UniHealth Foundation has no further obligation to sell us the shares. We do, however, have a right of first refusal to purchase the installments should UniHealth Foundation decide to sell.
(2)	On August 30, 2000, we purchased the August 2000 installment of 750,000 shares at $59.82 per share, based on the average stock price, as defined above for a total of $45  million.

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5.	Impairment, Disposition, Restructuring, Office of Personnel Management (“OPM”) and Other Charges (Credits)

We recognized net pretax charges (credits) for the nine months ended September 30, 2000 and 1999 as follows:

															Diluted Loss
			Quarter				Pretax Charges				Net-of-Tax				(Earnings)
			Recognized				(Credits)				Amount				Per Share
			(amounts in millions, except per share data)
2000
Restructuring charge				First			$	9.0			$	5.2			$	0.14
Other changes in estimates				First				(3.4	)			(2.0	)			(0.05	)
	Total impairment, disposition, restructuring and other charges							5.6				3.2				0.09
OPM credits				First				(3.0	)			(1.7	)			(0.05	)
				Total First				2.6				1.5				0.04
Loss on disposition of Ohio HMO				Second				3.8				2.2				0.06
Restructuring change in estimate				Second				(1.0	)			(0.6	)			(0.01	)
	Total impairment, disposition, restructuring and other charges			Total Second				2.8				1.6				0.05
Gain from license termination agreement				Third				(6.9	)			(3.8	)			(0.11	)
Loss on disposition of Ohio HMO				Third				0.5				0.2				0.01
Restructuring change in estimate				Third				(0.4	)			(0.2	)			(0.01	)
	Total impairment, disposition, restructuring and other credits			Total Third				(6.8	)			(3.8	)			(0.11	)
	Total net year-to-date impairment, disposition, restructuring, OPM and other credits						$	(1.4	)		$	(0.7	)		$	(0.02	)
1999
Ohio HMO goodwill impairment				Third			$	14.1			$	11.3			$	0.25
Utah HMO changes in estimates				Third				(10.7	)			(6.3	)			(0.14	)
Other disposition changes in estimates				Third				(5.6	)			(3.3	)			(0.07	)
	Total impairment, disposition, restructuring and other credits			Total Third			$	(2.2	)		$	1.7			$	0.04

2000. For the nine months ended September 30, 2000, we recognized net pretax credits of $1 million as described below.

•	Gain from license termination agreement. In the third quarter, we recognized other credits of $7 million for a gain from a license termination agreement relating to our subsidiary, Secure Horizons USA, Inc. This gain is a result of an early termination of the license agreement between Presbyterian Healthcare Services, Inc. and Secure Horizons USA, Inc. We expect Presbyterian Healthcare Services, Inc. to pay the termination fee by the end of 2000.
•	Loss on Disposition. In the second quarter, we recognized disposition charges of $4 million to exit our Ohio HMO operations. The charge included severance and legal costs. In the third quarter, we

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	recognized additional disposition charges of $0.5 million as a result of changes in estimated legal costs. See Note 2 “Acquisitions and Dispositions.”
•	Other Changes in Estimates. In the first quarter, we recognized other credits for changes in estimates of $3 million. We successfully settled certain contingencies related to acquisitions and dispositions in 1997 and 1998 including pending and threatened litigation, as well as indemnifications made to the buyers of sold subsidiaries.
•	OPM Credits. In the first quarter, we recognized OPM credits of $3  million as a result of Oklahoma HMO premiums received from rate reconciliations re-filed for years 1996 and 1997.
•	Restructuring Charge. In January 2000, we announced a plan to strengthen our operations and improve our competitive advantage and growth opportunities. In connection with this plan, we recognized restructuring charges of $9 million in the first quarter of 2000. The restructuring charge included severance and related employee benefits for approximately 270 employees whose positions were or will be eliminated by December 31, 2000. The majority of the terminations were in the sales and marketing and human resources departments where the corporate and regional functions were centralized and consolidated. In the second quarter, we recognized a credit for a change in estimate of $1 million and in the third quarter, we recognized a credit for a change in estimate of $0.4  million. This was as a result of employees who accepted other positions within the company and employees who resigned. The remaining 22 employees will be terminated by December 31, 2000. We paid approximately $1 million to terminated employees during the quarter ended September 30, 2000.

Approximately $2 million of the September 30, 2000 restructuring balance will be paid by the end of 2000, with the remainder to be paid in 2001. We plan to use cash flows from operations to fund the restructuring payments. We expect net annualized marketing, general and administrative salary savings of approximately $10 million from the centralization and consolidation of corporate and regional functions.

The following table presents the activity for the nine months ended September 30, 2000:

										Change in				Balance at
		Pretax Charge				Payments				Estimate				September 30, 2000
		(amounts in millions)
2000
Restructuring charge		$	9.0			$	(3.8	)		$	(1.4	)		$	3.8

1999. For the nine months ended September 30, 1999, we recognized net pretax credits of $2 million as described below.

•	Ohio HMO Goodwill Impairment. We recognized $14 million of Ohio HMO goodwill impairment charges. Third quarter operating losses, provider contract terminations and a lower membership base do not support the recoverability of goodwill. The majority of the impairment is not deductible for income tax purposes.
•	Utah HMO Changes in Estimates. We recognized $11 million of disposition credits. When we sold our Utah HMO, we retained responsibility for all medical claims and benefits payable for services rendered through September 30, 1998. Payments made through September 30, 1999, plus our current estimate of claims incurred but not reported, were $7 million less than original reserves existing at disposition. In addition, $4 million of severance, legal, and receivable reserves were settled for amounts less than originally estimated.
•	Other Disposition Changes in Estimates. We recognized $6 million of other disposition credits for changes in estimates. We have or expect to successfully settle certain contingencies related to other

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	dispositions from 1996 to 1998. Contingencies include pending and threatened litigation as well as indemnifications made to the buyers of sold subsidiaries.

6. Commitments and Contingencies

Provider Instability and Insolvency. Provider reserves include write-offs of certain uncollectable receivables from our providers and the estimated cost of unpaid health care claims normally covered by our capitation payments. Depending on state laws, we may be held liable for unpaid health care claims that were contractually the responsibility of the capitated provider. The balance of our provider insolvency reserves included in medical claims and benefit payable was $41 million at September 30, 2000 and $46 million at December 31, 1999.

Our insolvency reserves relate to specific providers. These reserves include estimates for potentially insolvent providers, where conditions indicate claims are not being paid or have slowed considerably. Based on information currently available, we believe that any liability in excess of amounts accrued would not materially affect our consolidated financial position. However, our evaluation of the likely impact of claims asserted against us could change in the future and an unfavorable outcome, depending on the amount and timing, could have a material effect on our results of operations or cash flows for a future period.

•

MedPartners Network. The California Department of Managed Health Care (“DMHC”; a newly created department assuming the managed care regulatory authority of the Department of Corporations) entered into a settlement with Alabama-based Caremark Rx, Inc. (“Caremark”; formerly MedPartners, Inc.) regarding its California subsidiary, MedPartners Network (“MPN”). MPN was a provider organization licensed by the DMHC that arranged health care services for HMO members through arrangements between HMOs and health care providers, such as hospitals and physician groups. MPN was one of our significant provider networks in California. In March 1999, California regulators seized MPN and appointed a conservator to oversee MPN. The conservator placed MPN in bankruptcy.

	In June 1999, the State of California, the DMHC, MPN and Caremark entered into an Operations and Settlement Agreement to ensure continuing patient care and to resolve certain claims by and against MPN and Caremark. We agreed to participate in the agreement, which required us to waive or subordinate certain claims against MPN in exchange for waivers of claims against us in connection with services provided by MPN or its affiliates in California. MPN ceased doing business and all of MPN’s affiliated medical groups in California were sold.
	In connection with the MPN bankruptcy, we asserted claims against MPN for amounts owed by MPN. In September 2000, the MPN Chapter 11 Plan of Reorganization was confirmed by the bankruptcy court. As a result, we received $2 million in approved claims payments. We are also engaged in negotiations to accept additional claim payments from a third party of $5 million. If these negotiations are not successfully completed by December 15, 2000, we will receive $4 million in approved claims directly from MPN.

•

KPC Medical Management. In the second quarter of 2000, we, along with other HMOs loaned approximately $12 million to KPC Medical Management, Inc. (“KPC”), a purchaser of some of the MPN practices, and Chaudhuri Medical Corporation, an affiliate of KPC. Our portion of the loan was approximately $3 million and was made and fully reserved during the second quarter of 2000. The principal and interest of the loan are guaranteed by Caremark.

	In the third quarter of 2000, we, along with six other HMOs loaned approximately $30 million to real estate entities affiliated with KPC. Our portion of this loan was approximately $10 million. A portion of

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	each plan’s loan was used to pay outstanding provider claims for its members and operating expenses of certain KPC medical entities.
	Because KPC is experiencing member and physician attrition, we believe that it is unlikely that KPC and its affiliates will be in a position to repay these loans. Therefore, we have fully reserved both loans. We continue to monitor the financial condition of KPC and its affiliates and cannot be certain that our loans are the extent of our exposure. We believe that any ultimate insolvency liability would not materially affect our consolidated financial position. However, our evaluation of the likely impact of claims asserted against us could change in the future and an unfavorable outcome, depending on the amount and timing, could have a material effect on our results of operations or cash flows for a future period.

OPM and Related Litigation. Our HMO subsidiaries have commercial contracts with OPM to provide managed health care services to federal employees, annuitants and their dependents under the Federal Employee Health Benefits Plan (“FEHBP”). Rather than negotiating rates with HMOs, OPM requires HMOs to provide the FEHBP with rates comparable to the rates charged to the two employer groups with enrollment closest in size to the FEHBP in the applicable community after making required adjustments. OPM further requires that every HMO certify each year that its rates meet these requirements.

Periodically, OPM’s Office of Inspector General (“OIG”) audits each HMO to verify that the premiums charged are calculated and charged in compliance with these regulations and guidelines. Each audit encompasses a period of up to six years. Following the government’s initial on-site audit, OPM will provide the HMO with a post-audit briefing indicating its preliminary results. Interpretations of the rating regulations and audit findings often raise complex issues. The final resolution and settlement of audits have historically taken more than three years and as many as seven years.

During the audit process, OPM may refer its findings to the United States Department of Justice (“DOJ”) if it believes that the health plan knowingly overcharged the government or otherwise submitted false documentation or certifications in violation of the False Claims Act. Under the False Claims Act, an action can be considered knowingly committed if the government contractor acted with actual knowledge, or with reckless disregard or deliberate ignorance of the government’s rules and regulations. If the government were to win a False Claims Act lawsuit against an HMO, the government could obtain trebled damages, a civil penalty of not less than $5,000 nor more than $10,000 for each separate alleged false claim, and the government could permanently disqualify the HMO from participating in all federal government programs.

In late 1997, we established a formal corporate compliance program to specifically address potential issues that may arise from the FEHBP rating process, to work with OPM to understand its interpretation of the rules and guidelines prior to completion of the rating process, to standardize the FEHBP rating process among all of our HMOs, and to help reduce the likelihood that future government audits will result in any significant findings. Based upon the results of a limited number of audits that have been conducted for contract years 1998 and later, we believe that this program has been effective.

Prior to our acquisitions of FHP International Corporation (“FHP”), the former FHP HMO subsidiary, TakeCare of California (“TakeCare”), was audited by the OIG. The OIG issued a draft audit report in September 1996 alleging that TakeCare overcharged the government. TakeCare responded to this draft audit in January 1997, questioning many of the auditors’ calculations and assumptions. In August 1999, we were notified that the auditors had referred some allegations to the DOJ for review of potential claims under the False Claims Act. We do not agree with the auditors’ interpretations of the applicable rules and guidelines or their method of calculating rates for the applicable period, and we do not believe there is any

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evidence that TakeCare of California engaged in any action that would violate the False Claims Act. We are negotiating with the DOJ to amicably resolve all claims relating to this audit.

In July 1999, we received a subpoena from the OIG for documentation regarding contracts between OPM and any of the HMOs owned by FHP that related to the contract years 1990 through 1997. Several of these contract years have already been audited, but are not yet settled, including the California audit discussed above. We believe we have complied with this subpoena, subject to certain disputed items. We believe that the DOJ is investigating whether to assert claims under the False Claims Act related to the FHP plans for these years. The government may also seek reimbursement for alleged overcharges by FHP plans that have not been audited. Finally, the government may seek treble damages and/or other remedies under the False Claims Act. We have initiated negotiations with the DOJ to amicably resolve these claims.

OPM has conducted an audit of our Oregon HMO subsidiary for the years 1991 through 1996. We have been notified that the auditors referred some allegations to the DOJ for review of potential claims under the False Claims Act.

We intend to continue to negotiate with OPM on any existing or future unresolved matters to attain a mutually satisfactorily result. We cannot be certain that any ongoing future negotiations will be concluded satisfactorily, that additional audits will not be referred to the DOJ or that additional, possible material, liabilities will not be incurred. Such liability could have a material effect on our results of operations or cash flows of a future period if resolved unfavorably.

Class Action Legal Proceedings. On November 2, 1999, Jose Cruz filed a purported class action complaint against PacifiCare, our California subsidiary, and FHP in the San Francisco Superior Court. On November 9, 1999, Cruz filed a first amended purported class action complaint that omitted FHP as a defendant. The amended complaint relates to the period from November 2, 1995 to the present and purports to be filed on behalf of all enrollees in our health care plans operating in California other than Medicare and Medicaid enrollees. The amended complaint alleges that we have engaged in unfair business acts in violation of California law, engaged in false, deceptive and misleading advertising in violation of California law and violated the California Consumer Legal Remedies Act. It also alleges that we have received unjust payments as a result of our conduct. The amended complaint seeks injunctive and declaratory relief, an order requiring the defendants to inform and warn all California consumers regarding our financial compensation programs, unspecified monetary damages for restitution of premiums and disgorgement of improper profits, attorneys’ fees and interest. We moved to compel arbitration and the court denied our motion. We have filed an appeal on this denial and deny all material allegations in the amended complaint and intend to defend the action vigorously.

On November 22, 1999, Debbie Hitsman filed a purported class action complaint against PacifiCare in the United States District Court for the Southern District of Mississippi, Hattiesburg Division. The complaint relates to the period from November 22, 1995 to the present and purports to be on behalf of all enrollees in our health care plans other than Medicare and Medicaid enrollees. The complaint alleges causes of action for violations of the Racketeer-Influenced and Corrupt Organizations Act and Employee Retirement Income Security Act of 1974 (“ERISA”). The complaint seeks an unspecified amount of compensatory and treble damages, injunctive and restitutionary relief, attorneys’ fees, the imposition of a constructive trust and interest. On June 23, 2000, Hitsman filed and served an additional complaint in the United States District Court for the Southern District of Miami as a purported part of a multi-district litigation proceeding against another managed care company, Humana. Subsequently, Dr. Dennis Breen and other doctors joined the Florida proceeding making allegations similar to those from other providers (see “Industry Litigation” below).

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In October 2000, the multi-district litigation panel consolidated the Hitsman cases, the Breen case, and certain provider cases in the Southern District of Florida. We have filed motions in the Southern District of Florida to compel arbitration, to dismiss and to transfer the cases to California. The court had not ruled on our motions as of the date of this report. In addition, in September 2000, Hitsman and the other plaintiffs filed a motion for class certification, which we intend to oppose. We deny all material allegations and intend to defend the actions vigorously.

In 1997, Tim Brady and other individuals filed a purported class action suit against PacifiCare, several PacifiCare officers and several former officers of FHP in the United States District Court for the Central District of California. In addition, in 1997, Brady and other individuals filed a purported class action suit against PacifiCare and several PacifiCare officers and several former officers of FHP in the Orange County Superior Court. Finally, in 1997, William Madruga and another individual filed a purported class action suit against PacifiCare and several of its directors and officers in the United States District Court for the Central District of California. Each of the complaints related to the period from the date of proxy statement for the FHP acquisition through our November 1997 announcement that earnings for the fourth quarter of 1997 would be lower than expected. These complaints primarily alleged that we previously omitted and/or misrepresented material facts with respect to our costs, earnings and profits. The trial courts dismissed both of the Brady cases and these cases are concluded following the plaintiff’s dismissal of appeals. In November 1999 and again in May 2000, the court dismissed the Madruga case in part without permission to amend and in part with permission to amend the complaint. The plaintiffs have filed a third amended complaint and we have filed another motion to dismiss, which is set for hearing on January 8, 2001. We deny all material allegations and intend to defend the actions vigorously.

Industry Litigation. On May 25, 2000, the California Medical Association (“CMA”) filed a complaint against PacifiCare and against other health plans in the United States District Court for the Northern District of California. At approximately the same time, Dr. Leonard Klay filed a similar lawsuit against PacifiCare and other health plans. These suits accuse the health plans of imposing unfair contract terms, unnecessarily denying and delaying payments for health care and reimbursing physicians at rates that are insufficient to cover costs.

We are involved in legal actions in the normal course of business, some of which seek monetary damages, including claims for punitive damages which are not covered by insurance. Based on current information and review, including consultation with our lawyers, we believe any ultimate liability that may arise from these actions (including all OPM, and related litigation, class action legal proceedings and industry litigation) would not materially affect our consolidated financial position, results of operations or cash flows. However, our evaluation of the likely impact of these actions could change in the future and an unfavorable outcome, depending upon the amount and timing, could have a material effect on our results of operations or cash flows of a future period.

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7. Earnings Per Share

We calculated the denominators for the computation of basic and diluted earnings per share as follows:

			Three Months Ended								Nine Months Ended
			September 30,								September 30,
			2000				1999				2000				1999
			(amounts in thousands)
Shares outstanding at the beginning of the period				34,904				46,032				37,252				45,616
Weighted average number of shares issued (acquired):
	Treasury stock acquired, net of shares issued			(252	)			(1,098	)			(1,891	)			(370	)
	Stock options exercised			4				—				73				229
Denominator for basic earnings per share				34,656				44,934				35,434				45,475
Employee stock options and other dilutive potential common shares(1)				206				143				198				257
Denominator for diluted earnings per share				34,862				45,077				35,632				45,732

(1)

Certain options to purchase common stock were not included in the calculation of diluted earnings per share because their exercise prices were greater than the average market price of our common stock for the periods presented. For the three months ended September 30, 2000 and 1999, these weighted options outstanding totaled 6.4 million (with exercise prices ranging from $55.23 to $114.00 per share). For the nine months ended September 30, 2000 and 1999, these weighted options outstanding totaled 6.3 million and 4.4 million, respectively (with exercise prices ranging from $53.88 to $114.00 per share).

8. Comprehensive Income

Comprehensive income represents our net income plus changes in equity, other than those changes resulting from investments by, and distributions to our stockholders. Such changes include unrealized gains or losses on our available-for-sale securities. Our comprehensive income totaled $13 million for the three months ended September 30, 2000 and $159 million for the nine months ended September 30, 2000. Comprehensive income totaled $63 million for the three months ended September 30, 1999 and $185 million for the nine months ended September 30, 1999.

9. Adoption of New Accounting Standards

Stock-Based Compensation. In March 2000, the Financial Accounting Standards Board issued Interpretation No. 44, “Accounting for Certain Transactions Involving Stock Compensation.” This Interpretation provides guidance on certain implementation issues related to Accounting Principles Board Opinion 25, “Accounting for Stock Issued to Employees.” Our adoption of this Interpretation as of July 1, 2000 did not have a material impact to our results of operations for the three and nine months ended September 30, 2000.

10. Future Application of Accounting Standards

Derivatives. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This standard requires companies to record all derivatives on the balance sheet as either assets or liabilities and measure those instruments at their fair value. The manner in which companies record gains or losses resulting from changes in the values of those derivatives depends on the use of the derivative and whether it qualifies for hedge accounting. This standard is effective for our consolidated financial statements beginning January 1, 2001, although early adoption is permitted. We believe that the adoption of this statement will not have a material impact to our consolidated financial position or results of operations.

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Item 2:  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

Overview. PacifiCare sells HMO and HMO-related products primarily to members in two groups: the Secure Horizons program for Medicare beneficiaries and the commercial programs for employer-group members and individuals. Our specialty managed care HMOs and HMO-related products and services supplement our Secure Horizons and commercial programs. These include pharmacy benefit management, life and health insurance, behavioral health services, dental and vision services and Medicare+Choice management services.

Events significant to our business in 2000 include the following:

•	In October and November 2000, we announced our intention to limit enrollment of new members in our Medicare+Choice health plan, Secure Horizons, through a combination of capacity waivers and voluntary notices. This plan is effective December 10, 2000 and will affect a total of 41 counties in California, Colorado, Oregon, Texas and Washington. This plan will not affect current or recently enrolled members, nor will it affect newly eligible Medicare beneficiaries (those turning 65 or becoming disabled). Retiree enrollment with January 1, 2001 effective dates will be accepted, except for those areas affected by capacity waivers in the Houston, Texas and Washington State areas.
•	In October 2000, we announced our intention to withdraw our commercial HMO and point-of-service (“POS”) products from 15 Colorado counties. This plan will affect approximately 25,000 commercial HMO and POS members, representing less than six percent of our total membership in Colorado. The effective date for this withdrawal is May 1, 2001. We will retain our commercial HMO products in other Colorado counties where the vast majority of our members reside. Qualified employers may apply for our preferred provider organization (“PPO”), which is not affected by this service area change.
•	For the nine months ended September 30, 2000, we recognized net pretax credits of $1 million for a license termination gain, OPM and other credits, offset by charges associated with the January 2000 workforce reduction. See Note 5 of the Notes to Condensed Consolidated Financial Statements.
•	In June 2000, we submitted our 2001 proposed Medicare benefit plan changes to the Health Care Financing Administration (“HCFA”) for approval. These changes include exiting (or partially exiting) Medicare operations in a total of 15 counties in Arizona, Colorado, Ohio, Texas and Washington. This proposal will affect approximately 24,000 Medicare members, or less than three percent of our total Medicare membership.
•	In June 2000, we announced our intention to exit our Ohio HMO operations. This plan will affect approximately 42,400 commercial members and 4,700 Medicare members located in Ohio and Kentucky. (These 4,700  Medicare members were included in our 2001 proposed Medicare benefits plan changes submitted to HCFA as discussed above.) We anticipate the exit will be completed by January 2001. We entered into an agreement with Anthem Blue Cross and Blue Shield to assist in transitioning Ohio’s commercial membership. Medicare members will have a choice of another Medicare+Choice HMO or traditional fee-for-service Medicare. See Note 2 of the Notes to Condensed Consolidated Financial Statements.
•	During the first half of 2000, we assumed approximately 18,000 members in Colorado and 21,000 members in Washington as a result of transition agreements signed with QualMed Plans for Health of Colorado and with QualMed Washington Health Plans, Inc. (together, “QualMed”), each a subsidiary of Foundation Health Systems, Inc. See Note 2 of the Notes to Condensed Consolidated Financial Statements.
•	On February 1, 2000, we completed our acquisition of Harris Methodist Texas Health Plan, Inc. and Harris Methodist Health Insurance Company Inc. (together, “Harris”), a health plan and insurance company in Texas with approximately 250,000 commercial and 50,000 Medicare members. See Note 2 of the Notes to Condensed Consolidated Financial Statements.

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2000 Compared With 1999

Membership. Total HMO membership increased 10 percent to approximately 4 million members at September 30, 2000 from approximately 3.7 million members at September 30, 1999. (Our total HMO membership excludes employer self-funded members and PPO and indemnity members.)

				At September 30, 2000												At September 30, 1999
Membership Data				Medicare				Commercial				Total				Medicare				Commercial				Total
HMO membership:
	Arizona				99,900				120,100				220,000				82,800				102,900				185,700
	California				565,700				1,838,000				2,403,700				616,800				1,710,000				2,326,800
	Colorado				76,100				287,200				363,300				76,100				319,300				395,400
	Guam				—				51,600				51,600				—				40,400				40,400
	Nevada				31,900				33,500				65,400				25,400				34,500				59,900
	Ohio				4,700				42,400				47,100				19,600				42,900				62,500
	Oklahoma				30,800				90,000				120,800				28,800				86,700				115,500
	Oregon				32,300				104,800				137,100				37,800				115,900				153,700
	Texas(1)				122,300				322,200				444,500				59,900				121,100				181,000
	Washington				62,300				100,200				162,500				64,400				74,900				139,300
		Total HMO membership			1,026,000				2,990,000				4,016,000				1,011,600				2,648,600				3,660,200
Other membership:
	Employer self-funded				—				61,500				61,500				—				54,500				54,500
	PPO and indemnity				—				37,200				37,200				—				30,500				30,500
		Total other membership			—				98,700				98,700				—				85,000				85,000
Total membership					1,026,000				3,088,700				4,114,700				1,011,600				2,733,600				3,745,200

(1)	Texas membership includes 43,500 Medicare and 184,000 commercial Harris members at September 30, 2000.

Medicare membership increased one percent at September 30, 2000 compared to the same period in the prior year due to:

•	Members acquired in Texas, primarily related to Harris; and
•	Competitor exits in markets where Secure Horizons will remain, primarily in Arizona, Nevada and Texas; partially offset by
•	Membership decreases primarily in California due to disenrollment resulting from reduced benefits, increased copayments and instituted or increased member-paid supplemental premiums in certain counties; and
•	Membership decreases as a result of our January 2000 county exits in Ohio, Washington, California and Oregon.

Commercial HMO membership increased approximately 13 percent at September 30, 2000 compared to the same period in the prior year due to:

•	Net membership increases due to acquired membership in Texas, Colorado and Washington, partially offset by membership decreases in Colorado due to an average 2000 premium rate increase of 14 percent; and
•	Growth in California primarily due to marketing efforts to retain membership and renew major employer accounts.

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Within commercial membership, employer self-funded membership increased approximately 13 percent at September 30, 2000 compared to the same period in the prior year primarily due to additional Harris membership, partially offset by membership losses in Colorado. PPO and indemnity membership increased approximately 22 percent at September 30, 2000 compared to the same period in the prior year primarily due to additional Harris membership.

Medicare Premiums. Medicare premiums increased eight percent or $111 million for the three months ended September 30, 2000 and nine percent or $392 million for the nine months ended September 30, 2000 compared to the same periods in the prior year as follows:

		Three Months Ended				Nine Months Ended
		September 30, 2000				September 30, 2000
		(amounts in millions)
Premium rate increases that averaged approximately seven percent for both the three and nine months ended September  30, 2000		$	97			$	321
The inclusion of premiums from the Harris acquisition			61				161
Net membership losses, primarily in California			(47	)			(90	)
Increase over prior year		$	111			$	392

Commercial Premiums. Commercial premiums increased 23 percent or $235 million for the three months ended September 30, 2000 and 23 percent or $691 million for the nine months ended September 30, 2000 compared to the same periods in the prior year as follows:

		Three Months Ended				Nine Months Ended
		September 30, 2000				September 30, 2000
		(amounts in millions)
The inclusion of premiums from the Harris acquisition		$	87			$	256
Premium rate increases that averaged approximately eight percent for both the three and nine months ended September  30, 2000			84				242
Net membership increases, primarily in California			64				193
Increase over prior year		$	235			$	691

Other Income. Other income increased approximately 13 percent or $4 million for the three months ended September 30, 2000 and 20 percent or $17 million for the nine months ended September 30, 2000 compared to the same periods in the prior year. The increases were primarily due to increased mail-service revenues, including mail-service revenues from Harris. Mail-service revenues are generated by our pharmacy benefit management company, where we, rather than network retail pharmacies, collect the member copayments.

Consolidated Medical Care Ratio. The consolidated medical care ratio (health care services as a percentage of premium revenue) increased for the three and nine months ended September 30, 2000 compared to the same periods in the prior year primarily due to:

•	Higher inpatient, outpatient and emergency service utilization under contracts which are fee-for-service or shared-risk arrangements;
•	Increased health care costs of $24 million of changes in estimate for June 30, 2000 shared-risk claims;
•	Reserves for uncollectable provider loans made in the third quarter and provider insolvency reserves totaling $24 million; and
•	Higher prescription drug costs; partially offset by
•	Premium rate increases.

The Medicare and commercial medical care ratios increases are consistent with the consolidated medical care ratio explanations. The commercial medical care ratio includes the specialty HMOs and indemnity insurance results. In the third quarter, we received additional claims information relating to new shared-

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This additional claims information impacted our medical claims and benefits payable estimates. Third quarter health care costs include $24 million of changes in estimates for shared-risk claims incurred but not reported, relating to the first and second quarters of 2000. In addition, we loaned one provider $10 million in the third quarter and do not expect these funds to be collectable. See Note 6 of the Notes to Condensed Consolidated Financial Statements. Including this write-off and other provider insolvency reserves, third quarter health care costs increased by an additional $24 million. The impact to the commercial and Medicare product lines for the $48 million ($0.77 diluted loss per share, net of tax) of changes in estimates and provider reserves is as follows:

		Three Months Ended September 30, 2000
		Medicare				Commercial				Total
		(amounts in millions)
Changes in medical claims and benefits payable estimates		$	10			$	14			$	24
Provider reserves			14				10				24
Increases to health care costs		$	24			$	24			$	48

The medical care ratios for the three months ended September 30, 2000 as reported and excluding the above health care cost increases are as follows:

											Excluding Health
											Care
			Reported								Cost Increases
			Three Months								Three Months
			Ended								Ended
			September 30,								September 30,
			2000				1999				2000				1999
Medical care ratio:
	Consolidated			89.7	%			84.7	%			88.0	%			84.7	%
	Medicare			91.0	%			87.3	%			89.5	%			87.3	%
	Commercial			87.9	%			80.9	%			86.0	%			80.9	%

Health care costs for the nine months ended September 30, 2000, were reduced by $9 million ($5 million or $0.14 diluted earnings per share, net of tax), of which $6 million related to our commercial product line. These reductions were a result of our favorable first quarter 2000 resolution of prior-period estimates relating to a provider contract. Since the health care cost increases for the three months ended September 30, 2000, described above, are related to 2000, they are included in the following medical care ratios:

											Excluding First
											Quarter
			Reported								Provider Credit
			Nine Months								Nine Months
			Ended								Ended
			September 30,								September 30,
			2000				1999				2000				1999
Medical care ratio:
	Consolidated			86.9	%			84.8	%			87.0	%			84.8	%
	Medicare			88.8	%			87.3	%			88.9	%			87.3	%
	Commercial			84.3	%			81.3	%			84.5	%			81.3	%

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Marketing, General and Administrative Expenses. For the three and nine months ended September 30, 2000, marketing, general and administrative expenses as a percentage of operating revenue decreased compared to the same periods in the prior year. The favorable impact of initiatives launched by our efficiency and effectiveness teams implemented in late 1999 included:

•	Cost improvements in our operations through technology applications and process redesign;
•	Lower costs on purchased vendor services through recontracting efforts; and
•	Improved productivity; partially offset by
•	Increased investments in medical management, actuarial and underwriting staff.

		Three Months								Nine Months
		Ended								Ended
		September 30,								September 30,
		2000				1999				2000				1999
Marketing, general and administrative expenses as a percentage of operating revenue			10.6	%			11.2	%			10.6	%			10.9	%

Impairment, Disposition, Restructuring, Office of Personnel Management (“OPM”) and Other Charges (Credits). We recognized net pretax credits of $7 million ($4 million or $0.11 diluted earnings per share, net of tax) for the three months ended September 30, 2000. For the nine months ended September 30, 2000, we recognized net pretax credits of $1 million ($0.7 million or $0.02 diluted earnings per share, net of tax). See Note 5 of the Notes to Condensed Consolidated Financial Statements.

Operating Income. Factors contributing to the changes are discussed above.

		Three Months								Nine Months
		Ended								Ended
		September 30,								September 30,
		2000				1999				2000				1999
Operating income as a percent of operating revenue			0.4	%			4.5	%			2.9	%			4.5	%

Net Investment Income. Net investment income increased approximately 40 percent for the three months ended September 30, 2000 and approximately 28 percent for the nine months ended September 30, 2000 compared to the same periods in the prior year due to:

•	Higher average invested balances; and
•	Increases in short- and long-term interest rates combined with the gradual shift of tax-exempt investments to higher yielding taxable securities.

Interest Expense. Interest expense increased significantly for the three months and nine months ended September 30, 2000 compared to the same periods in the prior year due to:

•	Increased borrowings on our credit facility to fund our share repurchase program; and
•	Higher short-term interest rates combined with a higher interest fee structure in the credit facility agreement.

Provision for Income Taxes. The effective income tax rate was 73.2 percent for the three months ended and 44.1 percent for the nine months ended September 30, 2000 compared with 43.8 percent for the three months ended and 42.2 percent for the nine months ended September 30, 1999. Because we lowered our 2000 earnings expectations, the non-deductible goodwill amortization expense is a higher percentage of pretax income, increasing our 2000 effective tax rate.

Liquidity and Capital Resources

Operating Cash Flows. Our consolidated cash, equivalents and marketable securities decreased to $1.4 billion at September 30, 2000 from $1.8 billion at December 31, 1999. The combined decrease in

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Investing Activities. For the nine months ended September 30, 2000, our investing activities provided $25 million in cash. This compared to $247 million used during the nine months ended September 30, 1999. We sold more securities than we purchased in the current year, which resulted in the majority of the $272 million net increase over the prior year.

Financing Activities. For the nine months ended September 30, 2000, we used $290 million of cash for financing activities compared to $223 million used for the same period in the prior year. The increase of $67 million in financing activities was the result of the following:

•	We repurchased 3.2 million shares of our common stock in 2000 for $162 million and 2.5 million shares of our common stock in 1999 for $158  million under our stock repurchase program; and
•	We paid a net $138 million in 2000 on our long-term debt (net of other borrowings), including net credit facility payments of $140  million, during the first nine months of 2000 compared to $25  million for the same period in 1999; partially offset because
•	We paid UniHealth Foundation $60 million in 1999 in consideration for UniHealth Foundation’s vote in favor of the reclassification of our stock and in consideration for the agreements and covenants contained in the stock repurchase agreement between PacifiCare and UniHealth Foundation. In addition, we incurred $2 million of expenses related to the reclassification of our common stock and the registration of the shares held by UniHealth Foundation. No consideration of this type was paid in 2000;
•	We received $8 million in 2000 from minority stockholders investing in SeniorCo, Inc.; and
•	We received $2 million in proceeds from issuing common shares in 2000 compared to $23 million in 1999.

Other Balance Sheet Change Explanations

Receivables, Net. Receivables, net increased $85 million from December 31, 1999 as follows:

•	$50 million net increase in premium receivables primarily due to premium rate increases;
•	$19 million increase attributable to the Harris acquisition;
•	$13 million net increase in other trade receivables primarily due to higher prescription drug rebate receivables and a receivable for a license termination agreement; and
•	$3 million net increase in provider receivables as a result of our higher proportion of shared-risk hospital contracts offset by and increased rate of collection.

Goodwill and Intangible Assets, Net. Goodwill and intangible assets increased $40 million from December 31, 1999 as follows:

•	$87 million increase attributable to the Harris acquisition; and
•	$15 million increase primarily attributable to membership acquisition and assumptions in Colorado and Washington; partially offset by
•	$62 million decrease attributable to goodwill and intangible amortization expense.

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Medical Claims and Benefits Payable. Medical claims and benefits payable increased $349 million from December 31, 1999 as follows:

•	$218 million increase in claims incurred but not reported for increases in shared-risk hospital arrangements. Under capitation arrangements, providers are prepaid based on a fixed-fee per-member per-month, regardless of the services provided to each member. Under shared-risk arrangements, claims are payable once incurred. This results in a payable for claims incurred, but not yet paid as well as an estimate of claims incurred but not yet reported to PacifiCare;
•	$101 million increase attributable to the Harris acquisition, including $28  million in loss contract reserves to be amortized through the fourth quarter of 2001; and
•	$30 million increase in provider capitation, incentive liabilities and other provider liabilities.

Accounts Payable and Accrued Liabilities. Accounts payable and accrued liabilities decreased $4 million from December 31, 1999 primarily due to decreases in accounts payable balances and accrued compensation.

Material Commitments. See Note 4 of the Notes to Condensed Consolidated Financial Statements for a discussion of our agreement to purchase shares of our common stock held by UniHealth Foundation.

New Accounting Pronouncements. See Note 10 of the Notes to Condensed Consolidated Financial Statements for a discussion of future application of accounting standards.

Forward Looking Information Under the Private Securities Litigation Act of 1995

This document contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including, “may,” “will,” “could,” “should,” “intend,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potentially,” “continue,” or “opportunity” or the negative of these terms or other comparable terminology. The statements about our plans, strategies, intentions, expectations and prospects contained throughout the document are forward-looking and are based on current expectations. Actual results may differ materially from those we predict as of the date of this report in the forward-looking statements. In addition, past financial performance is not necessarily a reliable indicator of future performance and investors should not use historical performance to anticipate results or future period trends. In evaluating these statements, you should specifically consider factors, including the risks described below and in other parts of this document.

Membership and Premium Risk Factors. An unforeseen loss of profitable membership or a change in premium expectations could negatively affect our financial position, results of operations or cash flows. Factors that could contribute to the loss of membership or lower premiums include:

•	The inability of our marketing and sales plans to attract new customers or retain existing customers;
•	The effect of premium increases, benefit changes and member-paid supplemental premiums and copayments;
•	Our exit from certain markets;
•	Reductions in work force by existing customers;
•	Negative publicity and news coverage or threats of litigation;
•	Our failure to successfully complete and/or integrate acquisitions; and
•	The loss of key sales and marketing employees.

Health Care Costs. Our profitability depends, in part, on our ability to control health care costs while providing quality care. Our primary focus is securing cost-effective physician, hospital and other health care provider contracts to maintain our qualified network of providers in each geographic area we serve.

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As a result, we have increased the capitation rates we pay some of our medical and hospital providers to improve network stability and to reflect the increased costs incurred by our capitated providers. We have reduced benefits, increased copayments and instituted or increased member-paid supplemental premiums in certain markets for our Secure Horizons members. In our commercial programs, we increased commercial premium rates in 2000 to reflect the higher costs of health care.

We work closely with our provider partners to ensure the strength and quality of our network. Under our capitated arrangements, we face the risk of a provider becoming insolvent. To reduce our insolvency risk, we have developed contingency plans that include shifting members to other providers and reviewing operational and financial plans to monitor financial stability. Certain of our providers will require more frequent monitoring. We may incur additional health care costs in the event of provider instability where we are unable to reach agreement with a provider that is mutually beneficial. These costs may be incurred when we need to contract with other provider groups at less than cost-effective rates to continue providing health care to our members. We believe our September 30, 2000 provider insolvency reserves, intended to pay for September 30, 2000 and prior health care services that may not be paid by insolvent or unstable providers, are adequate.

Although most of our contracts for physician services continue to be capitated, since the end of 1998, our hospital providers have increasingly requested per-diem, fee-for-service or shared-risk arrangements. In fee-for-service arrangements, we contract with hospitals to make payments based on billed charges, often discounted, for the service provided. In shared-risk arrangements, we share the risk of certain health care costs not covered by capitation arrangements. These types of contracts with providers generally include budgeted amounts for hospital inpatient, outpatient surgery and emergency room service utilization. In some cases, the utilization of the hospital services is above the budgeted amount specified in the contract. Some of the fee-for-service and shared-risk arrangements contain retroactive adjustments to January 1, 2000 of the contract year. As a result of the trend away from capitated contracts to fee-for-service and shared-risk contracts the percentage of consolidated members under capitated arrangements for hospital services decreased from approximately 80 percent at the end of 1999 to approximately 60 percent at September 30, 2000. Because of this contract shift, we are focusing on developing programs to manage health care costs while maintaining quality care.

The various changes we have made to premium rates, benefits, copayments and member-paid supplemental premiums, as discussed above, will not offset our increased health cares costs for 2000 for two primary reasons. During the first nine months of 2000 more of our hospital providers shifted to per-diem, fee-for-service or shared-risk contracts than we anticipated when we designed our 2000 programs. Hospital utilization by our members also significantly exceeded our expectations. We expect that the changes to our benefits programs and increased premiums for our Secure Horizons members in 2001 will not offset our rising health care costs in some markets. In addition, under fee-for-service and shared-risk contracts, we have increased utilization risk that can result in our actual medical costs substantially exceeding our expectations and our health care cost reserves. We will continue to invest in medical management resources throughout 2000 and 2001 to improve the performance of our provider contracts.

Pharmacy. Our prescription drug costs have been rising for the past few years. The increases are due to the introduction of new drugs costing significantly more than existing drugs, direct consumer advertising by the pharmaceutical industry creating consumer demand for particular brand drugs, patients seeking medications to address lifestyle changes and higher prescribed doses of medications and enhanced pharmacy benefits for members such as reduced copayments and higher benefit maximums. Our efforts to mitigate these trends and ensure appropriate utilization include formulary management, provider education, successful pharmaceutical contracting and increased utilization of our in-house mail service pharmacy operated by Prescription Solutions.

Formularies are lists of physician-recommended drugs in different therapeutic classes that have been reviewed for safety, efficacy and value. These lists help ensure that members get the right prescription at the right time in the right dose, avoiding potential adverse effects. Formularies also ensure that the costs are effectively managed; if two medications have the same effect, the less expensive option is

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Medical Care Ratio Risk Factors. An increase in our consolidated medical care ratio could have an adverse effect on our profitability. Uncertainties that could have a negative impact on our medical care ratio include:

•	A change in the mix of our capitated, shared-risk and fee-for-service provider contracts;
•	Medical and prescription drug costs that rise faster than premium increases;
•	Increases in utilization and costs of medical and hospital services;
•	Our inability to successfully implement our new medical management initiatives, including hospital utilization management initiatives;
•	The effect of federal and/or state legislation on our ability to secure cost-effective contracts with providers;
•	The effect of actions by competitors; and
•	Termination of provider contracts, provider instability or renegotiations of such contracts at less favorable rates or terms of payment.

Legislation and Regulation. Recent changes in state and federal legislation have increased and will continue to increase the costs of regulatory compliance, and proposed changes in the law may negatively impact our financial and operating results. These changes may increase our health care costs, decrease our membership or otherwise adversely affect our revenues and our profitability. Regulation and enforcement is increasing both at the state and federal level. Increased regulations, mandated benefits and more oversight, audits and investigations may increase our administrative, litigation and health care costs. The following recent or proposed legislation, regulation or initiatives could materially affect our financial position:

•	New and proposed legislation that would hold HMOs liable for medical malpractice (including proposed federal legislation that would remove or limit the federal preemption set forth in ERISA that precludes most individuals from suing their employer-based health plans for causes of action based upon state law). To date, Arizona, California, Texas, Oklahoma and Washington have enacted legislation that may increase the likelihood of lawsuits against HMOs for malpractice liability;
•	Existing and proposed legislation that would limit our ability to manage care and utilization such as “any willing provider” and “direct access” laws;
•	New state and proposed federal laws mandating benefits including those that mandate equal coverage for mental health benefits, commonly called mental health parity;
•	Proposed federal regulations that place new restrictions and administrative requirements on the use, electronic retention, transmission and disclosure of personally identifiable health information;
•	New and proposed legislation that permit and would permit independent physicians to collectively bargain with health plans on a number of issues including financial compensation;
•	Proposed legislation to add a prescription drug benefit, provide payment relief for the Medicare+Choice program and regulate drug pricing by the state and federal government could include provisions that impact Secure Horizons;
•	Proposed legislation and regulation could also include adverse actions of governmental payors, including reduced Medicare premiums; discontinuance of, or limitation on, governmentally funded programs;

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	recovery by governmental payors of previously paid amounts; the inability to increase premiums or prospective or retroactive reductions to premium rates for federal employees; and adverse regulatory actions;
•	New and increased initiatives at the DOJ, the Office of Inspector General of the United States Department of Health and Human Services, the Office of Inspector General of the United States Office of Personnel Management and the various enforcement divisions of the state regulatory agencies governing health care programs. These initiatives pursue both civil and criminal investigations against health care providers, payors, and pharmaceutical companies for misconduct relating to potential health care fraud and abuse, false claims, ERISA violations, violations of the Medicare program, overbilling of government programs, incorrect reporting of data, and improper denial or mismanagement of care;
•	Existing state legislation and regulation that may increase the financial capital requirements of providers who contract with HMOs to accept financial risk for health services. Proposed state legislation, regulation, or litigation that would otherwise limit our ability to capitate providers or delegate financial risk, utilization review, quality assurance or other medical decisions to our contracting providers; and
•	Existing state legislation and regulation that may require increases in minimum capital, reserves, and other financial liability requirements.

Industry Risk. Consumers and providers are currently attacking practices of the HMO industry through a number of separate purported class action lawsuits against PacifiCare (see Note 6 of the Notes to Condensed Consolidated Financial Statements) and against other national HMOs. These lawsuits, including those filed to date against PacifiCare, may take years to resolve and, depending upon the outcomes of these cases, may cause or force changes in practices of the HMO industry. These cases also may cause additional regulation of the industry through new federal or state laws. These actions ultimately could adversely affect the HMO industry and could have a material effect on our financial position, results of operations or cash flows of a future period and prospects of PacifiCare.

Aetna U.S. Healthcare, Inc. and affiliated entities (“Aetna”) recently settled claims brought by the Attorney General of Texas by consenting to modify some of its business practices in Texas. The Attorney General of Texas has filed similar claims against PacifiCare’s Texas HMO and has proposed to settle the lawsuit on the same terms as the Aetna settlement. The business practices in question relate primarily to our Texas HMO’s commercial operations. We are in the process of evaluating the proposed settlement and the potential impact of the settlement on our operations. We are unable to predict whether we will reach a settlement with the Attorney General on these or other terms or the impact that the settlement could have on our operations. These changes ultimately could adversely affect the HMO industry and could have a material effect on our financial position, results of operations or cash flows of a future period and prospects of PacifiCare.

Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA includes administrative simplification provisions directed at simplifying electronic data interchange through standardizing transactions and codes, establishing uniform health care provider, payer, employer and patient identifiers and seeking protections for confidentiality and security of patient data. The first set of final rules, Data Standards and Code Sets, was released in August 2000. We are required to become compliant with these rules by October 2002. Additional proposed rules are expected to be released as final later this year, continuing into 2001. PacifiCare’s compliance dates will be 26 months from the date each final rule is published. Our Program Management Office has been facilitating an assessment effort to determine the impact of HIPAA on PacifiCare, which is on track to be completed in 2000. Once completed, we will determine our solution strategies and define an implementation plan to satisfy the known HIPAA rules. We realize additional rules, or modified rules, will continue to be released. We will incorporate these into our project as they present themselves. Until our assessment, solution strategies and planning efforts are completed, we are unable to provide an accurate cost to comply with HIPAA administrative simplification requirements.

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Marketing, General and Administrative Risk Factors. The following factors could have an adverse impact on marketing, general and administrative expenses:

•	Our compliance with HIPAA;
•	Our need for additional advertising, marketing, administrative or management information systems expenditures;
•	The success of our marketing and sales plans to attract new customers;
•	Our need for increased claims administration;
•	Our need for additional unanticipated investments in medical management, claims processing and underwriting resources and technology;
•	Integration costs for acquisitions that exceed our expectations; and
•	Our inability to achieve the anticipated efficiencies and resulting cost savings.

Future Dispositions, Impairments and Restructurings. While we previously announced our decision to exit the Ohio operations, we may announce in the future other dispositions of assets as we continue to evaluate whether our subsidiaries or products fit within our strategy. We review long-lived assets for impairment when events or changes in business conditions indicate that we may be unable to recover such assets’ full carrying value. We consider assets to be impaired and write them down to fair value if we determine that the realizable value of long-lived assets such as property and equipment, real estate and goodwill are less than the value at which we carry such assets on our consolidated financial statements. Certain of our subsidiaries with operating losses will require more frequent monitoring. If one or more of these subsidiaries generates less operating cash flows than we currently expect, an impairment charge could be necessary. In addition, as we refocus and retool our workforce to shift from a capitated to a shared-risk business model, we expect some positions to change or be eliminated, which could result in a restructuring charge. We cannot be certain that the dispositions, impairments or restructuring charges will not result in additional pretax charges. We believe that any disposition, impairment or restructuring charges would not materially affect our current consolidated financial position. However, the disposition, impairment or restructuring charges could have a material effect on the results of operations or cash flows of a future period.

Weighted Average Number of Shares. The following factors could affect the weighted average number of shares calculation for 2000:

•	Fluctuations in our stock price that influence the number of shares repurchased and the options exercised;
•	The magnitude of stock options or restricted stock granted during the year;
•	Any unanticipated stock-for-stock acquisitions, equity, convertible preferred or debt issuances; and
•	Management decisions to use cash from operations or credit facility borrowings on business initiatives other than share repurchases.

Office of Personnel Management Contingencies. We intend to negotiate with OPM on any existing or future unresolved matters to attain a mutually satisfactory result. We cannot be certain that any ongoing and future negotiations will be concluded satisfactorily, that additional audits will not be referred to the Department of Justice, or that additional, possibly material, liability will not be incurred. Such liability could have a material effect on results of operations or cash flows of a future period if resolved unfavorably. See Note 6 of the Notes to Condensed Consolidated Financial Statements.

Adjusted Community Rate Filings. As a result of the Balanced Budget Act of 1997 and related HCFA rules and regulations, our HMO subsidiaries are required to submit separate adjusted community rate (“ACR”) proposals for every Medicare+Choice plan they offer to Medicare beneficiaries.

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Each of our subsidiaries must submit the ACR proposals, generally by county or service area, to HCFA by July 1 for each Medicare+Choice plan offered in the subsequent year. In the normal course of business, all information submitted as part of the ACR process is subject to audit by HCFA. Beginning in January 2000, HCFA contracted with the Office of Inspector General of the United States Department of Health and Human Services to conduct more comprehensive audits on one-third of all ACR filings as mandated by law. We cannot be certain that any ongoing and future audits will be concluded satisfactorily. We may incur additional, possibly material, liability as a result of these audits. The incurrence of such liability could have a material effect on results of operations or cash flows of a future period.

Liquidity and Capital Resources. The final maturity date on our credit facility is January 1, 2002. Our ability to refinance this credit facility depends on our credit rating, results of operations and cash flows from operations. Our ability to repay amounts owed under the credit facility depends on dividends from our subsidiaries. Nearly all of the subsidiaries are subject to HMO regulations or insurance regulations and may be subject to substantial supervision by one or more HMO or insurance regulators. Subsidiaries subject to regulation must meet or exceed various capital standards imposed by HMO or insurance regulations, which may from time to time impact the amount of funds the subsidiaries can pay to us. Our subsidiaries are not obligated to make funds available to us and creditors of our subsidiaries have superior claim to our subsidiaries’ assets. Additionally, from time to time, we advance funds in the form of a loan or capital contribution to our subsidiaries to assist them in satisfying federal or state financial requirements. If a federal or state regulator has concerns about the financial position of a subsidiary, a regulator may impose additional financial requirements on the subsidiary, which may require additional funding from us. We believe that cash flows from operations and other financing sources will be sufficient to meet the requirements of the credit facility and our business operations during the next twelve months.

Risk-Based Capital Requirements. The National Association of Insurance Commissioners has proposed that states adopt risk-based capital standards that, if implemented, would require new minimum capitalization limits for health care coverage provided by HMOs and other risk-bearing health care entities. Risk-based capital requirements currently apply for Colorado, Indiana and Washington. Arizona and Texas have adopted the risk-based capital requirements for 2001. We do not expect this legislation to have a material impact on our consolidated financial position in the near future as states continue to adopt these standards. We believe that cash flows from operations and other financing sources will be sufficient to fund additional risk-based capital requirements. Further borrowings under the credit facility could be used for risk-based capital requirements, if necessary.

Other. Results may also differ materially from those projected, forecasted, estimated and budgeted by us due to adverse results in ongoing audits or in other reviews conducted by federal or state agencies or health care purchasing cooperatives; adverse results in significant litigation matters; and changes in interest rates causing changes in interest expense and net investment income.

Expectations. The following are updates to our 2000 and 2001 expectations as reported in our October 10, 2000 Press Release. Our current expectations do not reflect any potential upside with regard to payment reform for Medicare+Choice.

•	We expect earnings per share for the fourth quarter 2000 to range from $0.20 to $0.30. This estimate excludes the effect of any restructuring charge that may occur as we refocus and retool our workforce to shift from a capitated to a shared-risk business model.
•	In 2001, we estimate that an additional 15 to 20 percent of our September  30, 2000 membership could convert to shared-risk hospital contacts.
•	In 2001, we expect commercial premium rate increases to average more than 13  percent.
•	In 2001, we expect the increase in average commercial premium revenue to range between 11 and 12 percent.

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

The principal objective of our asset/liability management activities is to maximize net investment income, while managing levels of interest rate risk and facilitating our funding needs. Our net investment income and interest expense are subject to the risk of interest rate fluctuations. To mitigate the impact of fluctuations in interest rates, we may use derivative financial instruments, primarily interest rate swaps.

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PART II:  OTHER INFORMATION

Item 1: Legal Proceedings

      See Note 6 of the Notes to Condensed Consolidated Financial Statements.

Item 2: Changes In Securities

      None.

Item 3: Defaults Upon Senior Securities

      None.

Item 4: Submission of Matters to a Vote of Security Holders

      None.

Item 5: Other Information

•	On October 4, 2000, we announced the appointment of Maria Z. Fitzpatrick as Senior Vice President and Chief Information Officer.
•	On October 13, 2000, Richard J. LaBrecque resigned from the position of Senior Vice President of Sales and Marketing.
•	On October 25, 2000, we announced the resignation of Robert W. O’Leary as President, Chief Executive Officer and Director of PacifiCare Health Systems, Inc. Chief Financial Officer, Howard G. Phanstiel, was appointed to President and Chief Executive Officer on an interim basis. Mr. Phanstiel was also named to the board of directors.

Item 6: Exhibits and Reports on Form 8-K

(a)  Exhibit Index

Exhibit
Number				Description
	15			Letter re: Unaudited Interim Financial Information
	20			Independent Accountants’ Review Report
	27			Financial Data Schedule (filed electronically)

(b)  Reports on Form 8-K:

	On July 21, 2000, we filed a Form 8-K announcing the appointment of Howard G. Phanstiel as Executive Vice President and Chief Financial Officer, and Bary G. Bailey as Executive Vice President and Chief Strategic Officer.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PACIFICARE HEALTH SYSTEMS, INC.
	(Registrant)

Date: November 13, 2000

	By:	/s/ MARY C. LANGSDORF

	Mary C. Langsdorf
	Senior Vice President of Finance
	(Principal Financial Officer)

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EXHIBIT INDEX

Exhibit
Number				Description
	15			Letter re: Unaudited Interim Financial Information
	20			Independent Accountants’ Review Report
	27			Financial Data Schedule (filed electronically)

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