Sierra Health Services earnings increase despite drop in revenue

Michelle Swafford

Tuesday, April 26, 2005 | 11:12 a.m.

Las Vegas-based Sierra Health Services Inc. announced Monday afternoon that its profit increased 13 percent in the first quarter and beat analysts' expectations, despite a dip in revenue.

The insurer, which owns Sierra Health & Life, Health Plan of Nevada and Senior Dimensions, said its first-quarter net income increased to $29.4 million, or 87 cents per share, from $25.8 million, or 74 cents per share. That included a one-time gain of $838,000 for a tax benefit on its discontinued operations, compared with a one-time loss of $486,000 for the same period of 2004.

Analysts surveyed by Thomson Financial had expected Sierra to earn 79 cents per share.

Sierra's shares rose 56 cents per share, or nearly 1 percent, in mid-morning trading to $61.86 per share on the New York Stock Exchange.

First-quarter revenue dipped to $335.8 million from $408.2 million in the year-ago quarter.

The decline was attributed to the ending of Sierra's TRICARE military contract, which managed military personnel's health benefits and ended Aug. 31, Sierra spokesman Peter O'Neill said.

The contract and claims should be phased out in the second quarter and Sierra expects that the exit will be profitable, Chief Financial Officer Paul Palmer told investors in a conference call today.

Although overall revenue declined in the first quarter, medical premium revenue rose 17 percent during that period.

The majority of the premium increase is due to an increase in membership because of Nevada's population and business growth and increases within current accounts, O'Neill said before the conference call.

"Certainly we have been very pleased with how our commercial membership has grown," O'Neill said. "For the past couple of years we've exceeded growth projections."

The number of commercial members increased 14 percent to 241,300 people in the first-quarter from 212,000 members in the year-ago period.

It is estimated that the number of commercial members would increase between 9 percent and 11 percent this year, Chief Executive, President and Chairman Dr. Anthony Marlon told investors today.

Commercial premium increases are averaging 5 percent to 7 percent before benefit changes that increase employees' contributions, which include increasing co-payments, co-insurance and deductibles, Marlon said.

Sierra's private Medicare plan, Senior Dimensions, increased its membership 4.4 percent to 54,000 people from 51,700 people in the year-ago quarter.

The number of people insured with Senior Dimensions is expected to increase between 5 percent and 8 percent this year, Marlon said.

Sierra applied to the Centers for Medicare and Medicaid Services to offer drug plans as a regional preferred-provider organization in Nevada and similar plans in Mohave, Maricopa and Pima counties in Arizona and several counties in Utah.

The increase in Medicare plans is not meant to be "a windfall" for the company, but is expected to be a "good business" that allows Sierra to offer a broader number of options, O'Neill said.

Hospital stays, which commonly tick up in the first quarter, and an increased use of prescriptions drugs increased Sierra's costs in the first quarter, Marlon told investors.

Sierra also operates 13 physicians' practices, called Southwest Medical Associates, and one outpatient surgery center.

Two other physicians' clinics are planned, one for the northwest part of the valley and another in the southwest part of the valley.

Sierra is in the process of negotiating new hospital contracts with Las Vegas Valley hospitals. Its contract with Universal Health Services Inc. -- owner of Valley, Desert Springs, Summerlin and Spring Valley hospitals -- expires in June.

The contract with HCA Inc. -- owner of Sunrise, MountainView and Southern Hills hospitals -- expires in 2006.

The contract increases are expected to be between 6 percent and 8 percent, Marlon said.

Contracts with Clark County-owned University Medical Center and Catholic Healthcare West -- owner of St. Rose Dominican Hospitals -- are regularly reviewed and adjusted.

Sierra has repurchased 8.9 million worth of shares, which includes the purchase of 178,000 shares in the first quarter at an average price of $58.14 per share.