Sierra Health profit increases 89 percent

Michelle Swafford

Thursday, July 22, 2004 | 11:07 a.m.

Sierra Health Services Inc., the largest managed-care insurer in Nevada, Wednesday reported an 89 percent increase in second-quarter profit, beating analysts' expectations thanks to strong growth in its commercial membership and its ability to price premiums above rising medical costs.

The company also raised its annual financial outlook.

Sierra's profit for the quarter rose to $38.2 million, or $1.10 per share, from $20.3 million, or 67 cents per share, in the year-ago quarter. The net income includes a one-time gain of 30 cents per share for a settlement and price adjustments on the company's Department of Defense TRICARE contract, which manages military personnel's health benefits.

The income generated from the TRICARE contract has been averaging $8 million per quarter, but an increase in reserve military personnel called to active duty has increased the number of people with TRICARE benefits, Sierra Health spokesman Peter O'Neill said.

Sierra's TRICARE contract will end Aug. 31 because the company lost a bid to continue the contract. The new contractor is Health Net Inc.

Quarterly revenue rose to $441.2 million from $370.2 million for the same period in 2003.

Commercial medical premiums rose to $280.7 million during the second quarter, up from $239.1 million in the year-ago quarter. In contrast, Sierra's medical expenses increased to $218.4 million in the second quarter from $189.8 million a year ago.

An increase in the number of members and higher premiums are both factors in Sierra's increased revenue, Sierra Chief Financial Officer Paul Palmer told investors today.

Dr. Anthony Marlon, chief executive and chairman of Sierra, said premium renewals are averaging between 6 percent and 7 percent above last year, which does not include changes in benefits, which can add to premium costs.

He said part of the increase in revenue and commercial membership is a result of gaming employers switching from self-funded insurance plans where the employers assume the medical risk and pay the full medical claims to traditional managed-care plans where Sierra assumes the risk in exchange for monthly premiums.

"We pay less than any other payer pays, so our cost basis is less," Marlon said. "They can insure with us and be assured of lower cost trends."

Also, some construction employers are paying higher premiums to reduce their employees' co-payments, making benefits richer to attract employees, Marlon said.

Analysts polled by Thomson Financial Network had expected Sierra to post average second quarter earnings per share of 74 cents and annual earnings per share of $3.01.

Sierra had previously announced it expected to earn between $2.90 and $3 per share for 2004. The company now expects to earn between $3.35 and $3.45 per share as a result of the additional TRICARE income, increased commercial membership and its ability to contain costs.

Sierra's shares rose nearly 6 percent to $46.54 per share in mid-morning trading today.

During the quarter, Sierra repurchased 1.2 million shares of its common stock for $50.8 million. Since Sierra's board authorized the repurchase program in January 2003, the company has repurchased 7.5 million shares of its common stock for $182.2 million.

Sierra's commercial membership of 215,700 was up 2 percent from the first quarter and was up 11 percent from the end of the year-ago quarter.

Sierra estimates its commercial membership segment will increase by 10 percent for the year because of population growth in the Las Vegas Valley, which is the company's core market, O'Neill said.

"The city keeps growing and we keep growing," he said. "We have been able to attract many new businesses that have moved to Las Vegas, particularly those from California."

Membership in Sierra's Medicare + Choice, which is called Senior Dimensions and provides more benefits than traditional Medicare, increased 5 percent to 52,200 members in the second quarter from the end of the year-ago quarter and was up 1 percent from the first quarter.

Despite the increase, Sierra has reduced its annual Senior Dimensions membership growth projection from 10 percent to 5 percent because many seniors with traditional Medicare are sticking with their current plans until they better understand the new prescription benefits associated with their plans, O'Neill said.

In addition to overall membership growth and improved premiums, Sierra attributed some of its higher profit to being able to contain health care costs. For example, Sierra is passing some increased prescription drug costs onto its members, requiring them to pay a great share, O'Neill said.

Prudential Equity Group LLC. analyst David Shove said in a report Wednesday that the company also has controlled medical costs through high generic drug utilization.

Sierra operates 12 Southwest Medical Associates clinics. Southwest Medical is a Sierra-owned network of physicians and clinics that many Sierra members use. The company is expanding one of its clinics and plans to break ground soon on a new clinic in the southwest part of the Las Vegas Valley.