Sierra Health posts strong earnings

Michelle Swafford

Thursday, Jan. 29, 2004 | 11:10 a.m.

Sierra Health Services Inc. of Las Vegas, the largest health insurer in Nevada, on Wednesday reported a fourth-quarter profit of $4.8 million, or 16 cents per share, exceeding analysts' expectations by 5 cents.

Officials reported strong Las Vegas-area membership increases coupled with strong premium pricing and a slowdown in the rise of medical costs.

The results represent a 7 percent increase from the $4.5 million, or 14 cents per share, posted in the same period a year ago. Revenue rose 14 percent to $373.4 million.

Despite a few difficulties in the fourth quarter, including losing an appeal to manage military benefits for about 704,000 active and retired military personnel through the TRICARE program, Sierra overcame its setbacks by increasing membership.

In the fourth quarter, commercial membership rose to 202,400 members from 187,300 a year ago. Total membership, which includes private Medicare plans, was up by about 20,000 to 1.2 million.

In addition to increased membership, Sierra has benefited as the rise in hospital and pharmacy costs has slowed, Peter O'Neill, Sierra's spokesman, said.

"The trend won't last forever," he said. "This is a short-term phenomenon that we will get some benefit from for the next year or two."

In mid-morning trading today, Sierra stock rose 4.2 percent to $28.65.

Sierra is helped by having its own in-house physicians' network, Southwest Medical Associates, a group of 185 doctors at 11 valley locations. O'Neill said about 75 percent of Sierra's members receive their primary care and some specialty care from Southwest Medical Associates locations, which cuts down on the administrative overhead associated with using doctors outside the network.

"They kept good control of their medical costs," Stephen Velgot, an analyst with Cathay Financial, said. "The reason they have this ability is attributable to Southwest Medical Associates. Most managed care companies don't have something like a Southwest Medical Associates."

Velgot said that the doctor network has been "a key to Sierra's success" and a "real cost benefit." That benefit will continue to grow as the company announces more medical centers that will be a part of Southwest Medical Associates.

O'Neill said more locations will be added soon, but he wouldn't provide further detail.

In the fourth quarter, Sierra purchased 1.8 million shares of its stock for $46.7 million to offset a potential increase in the number of shares outstanding. That potential increase would follow the conversion of $115 million of convertible debt into stock. Sierra Health had issued the debt early in the year and it reached the requirements for conversion into stock in December.

Although it's unlikely the bondholders will exercise the conversion in the immediate future, O'Neill said, accounting rules require Sierra to recognize the potential increase of stock.

Sierra sold its workers' compensation subsidiary, California Indemnity Insurance Co., to Folksamerica Holdings Co. Inc. for $79.5 million in November. The subsidiary was counted as discontinued operations for most of the year.

In the coming quarters, Sierra expects membership growth to continue to increase, O'Neill said.

"We have had considerable membership growth in January alone," he said. "More people are interested in the types of products that we offer."

Sierra had originally projected 7 percent membership growth in 2004. The company now says growth will exceed that level but wouldn't give a specific number.

In the near future, Sierra will decide whether to take legal action in federal court after losing the TRICARE contract, which Sierra currently manages in 13 Eastern states, O'Neill said.

If Sierra opts not to take legal action, the TRICARE contract it manages will end beginning in September. Some revenue will be received for six months after as the TRICARE contract is gradually phased out.

"None of us really are looking for Sierra to win that contract," Velgot said. "We just would like to get that matter resolved."