Sierra Health Services raises annual outlook

Michelle Swafford

Thursday, Oct. 21, 2004 | 11:12 a.m.

Las Vegas-based Sierra Health Services Inc., the largest Nevada insurer, Wednesday reported solid earnings for the third quarter and raised its annual financial outlook.

The managed-care insurer reported net income rose to $30.7 million, or 90 cents per share, in the third quarter compared with $22.2 million, or 72 cents per share, in the year-ago quarter. Analysts on average had expected Sierra to earn 80 cents per share for the quarter.

Sierra attributed its strong profit to increased membership and an ability to keep health care costs low by passing on more of the costs to consumers.

Revenue for the third quarter rose to $393.3 million, compared with $389.2 million in the year-ago quarter.

Sierra increased its financial guidance for the year to between $3.45 and $3.50 per share. The company had previously predicted annual earnings of between $3.35 and $3.45 per share.

"We see no cracks in this dominant Las Vegas HMO franchise," Prudential Equity Group analyst David Shove wrote in a report following the earnings release.

Sierra also announced with its third quarter results that it has amended its revolving credit line to $100 million from $65 million and extended the credit line's maturity to December 2009 from April 2006.

The company's stock was trading at $44.01 per share in midday trading on the New York Stock Exchange, down 1 percent from the previous closing price of $44.54.

Sierra's stock tumbled Tuesday by nearly 17 percent to close at $41.30 per share after news broke that New York Attorney General Eliot Spitzer was expanding his probe of insurance broker fees that may be a conflict of interest. Sierra was not mentioned in the probe and does not do business in New York, but the majority of the insurance industry's stocks took a hit.

The number of people Sierra insures on its commercial plans increased 11 percent during the third quarter to 222,200, up from 199,400 people a year ago.

The number of people enrolled in Sierra's Medicare + Choice plan, which is Sierra's private Medicare plan that offers more benefits than traditional Medicare, increased 5 percent to 53,000 people from 50,400.

Sierra anticipated its commercial membership would grow between 7 percent and 9 percent in 2004. From January to September, Sierra increased its membership by 10 percent, said Peter O'Neill, company spokesman.

Sierra had anticipated its membership for its Medicare + Choice plan would increase between 8 percent and 9 percent for the year, but last quarter revised its membership projection to between 5 percent and 6 percent.

"Seniors are taking a wait-and-see attitude until the elections are over," O'Neill said, adding that seniors are confused by the changes to traditional Medicare and the political rhetoric touted by President Bush and Sen. John Kerry.

On Aug. 31 Sierra ended its Department of Defense TRICARE contract that managed military personnel's health benefits. The company will receive some revenue for the next two quarters during the transition to Health Net Inc. During the third quarter, Sierra earned nearly $86 million from the TRICARE contract, down from $389.2 million in the year-ago quarter.

The company has retained about 95 percent of its members and is averaging premium renewal increases of between 6 percent and 7 percent, which does not include benefit changes, Sierra Chief Executive and Chairman Dr. Anthony Marlon told analysts today.

Sierra anticipates its membership will grow in 2005 between 6 percent and 9 percent and a portion of that is likely to come from the April opening of Wynn Las Vegas, which could add between 1,000 and 2,000 members since Sierra is the only HMO that will be offered, Marlon said.

This year, an increasing number of employers are switching to health plans that pass on more of the costs to consumers, which helps employers and Sierra control their costs, O'Neill said.

"We have been very effective in managing the costs," he said.

Between 60 percent and 70 percent of the drugs filled by Sierra members are generic, which cost much less than brand-name drugs, he said.

Sierra also owns 12 Southwest Medical Associates clinics, which are a network of physicians that many of its members use. The company has plans to build one in the southwest part of Las Vegas and one in the northwest.