Las Vegas-based Sierra Health Services Inc. reported that net income for the quarter ended June 30, 2005 was $33.8 million or $1.01 per diluted share, compared to $38.2 million or $1.10 per diluted share for the same period in 2004. Operating income from the company’s core managed care and corporate operations segment was $44.4 million for the quarter compared to $36.6 million for the same period in 2004, an increase of 21 percent. Operating income from the company’s expired military health services operations segment was $12.0 million for the quarter, compared to operating income of $24.6 million for the same period in 2004, when the segment was fully operational.
Assuming dilution, on average, analysts who included the previously announced gains associated with settlements for the military health services operations had expected the company to post second quarter 2005 earnings of $0.99 per share. All analysts as a group, including those who had not included the gains in their assumptions, had expected Sierra to post second quarter 2005 earnings of $0.87 per share, on average.
Revenues for the quarter were $348.0 million, compared to $441.3 million for the same period in 2004. This decrease is due to the cessation of healthcare delivery operations in the third quarter of 2004 at the company’s military health services subsidiary. Medical premium revenues from Sierra’s core managed care operations were $320.4 million for the quarter, compared to $280.7 million for the same period in 2004, an increase of 14 percent.
In the second quarter, Sierra’s medical care ratio was 76.0%, a 40 basis point increase from the 75.6 percent reported in the same period in 2004 and a 30 basis point sequential decrease from the 76.3 percent reported in the first quarter of 2005. Sierra’s medical claims payable balance decreased to $121.5 million at June 30, 2005, compared to $128.1 million at March 31, 2005. Days in claims payable, which is the medical claims payable balance divided by the average medical expenses per day for the period, were 44 days for the second quarter of 2005, compared to 47 days for both the second quarter of 2004 and sequentially. The decrease in this measurement is primarily due to a lower volume of hospital admissions during the month of June, a scheduled payment on a negotiated settlement previously accrued and to fewer pended claims.
As a percentage of premium revenue, general and administrative expenses for the second quarter improved 290 basis points to 13.2 percent from 16.1 percent for the same period in 2004. Excluding the general and administrative expenses related to the sold workers’ compensation operations, expenses as a percentage of premium revenue would have been 12.9 percent, an improvement of 110 basis points from 14.0 percent for the same period in 2004.
Interest expense for the quarter was $4.4 million, compared to $1.2 million for the same period in 2004 and $1.6 million sequentially. The majority of this expense was related to the conversion of a portion of the company’s convertible debentures. During the quarter, through private negotiations, $34.0 million of the company’s senior convertible debentures, issued in March 2003, were converted to 1.9 million shares of common stock. Interest expense for the quarter included the pre-paid interest to induce conversion and the write-down of the associated deferred financing fees.
Operating cash flow from continuing operations was $16.0 million for the quarter, compared to $48.4 million for the same period in 2004. The lower cash from operations for the quarter is primarily due to the timing of income tax payments and cash used to fund the liabilities and claims phase-out for the company’s military health services operations.
At June 30, 2005, Sierra’s total external debt was $81.5 million, compared to $125.5 million at Dec. 31, 2004. The outstanding balance of the remaining convertible debentures, after the conversion of $34.0 million as reported above, is $81.0 million. Additionally, Sierra repaid the $10.0 million outstanding on its line of credit, and elected to increase the aggregate commitments of its revolving credit facility to $140.0 million from $100.0 million. Currently no amounts are drawn on this line.
During the second quarter, Sierra purchased 622,000 shares of its common stock in the open market or private transactions for $40.5 million, at an average price of $65.13 per share. As of June 30, 2005, including purchases in 2003 and 2004, the company has purchased 9.5 million shares for $284.2 million, at an average price of $29.86.
In the second quarter of 2005, same store commercial membership grew by nearly 1.6 percent, or 3,800 lives. For the first six months of the year, commercial membership grew 8.4 percent, or 18,900 lives. In the quarter, Medicare membership grew by 1.3 percent or 700 lives. For the first six months of the year, Medicare membership grew 2.6 percent or 1,400 lives. In the quarter, Medicaid membership grew 4.2 percent or 2,100 lives. For the first six months of the year, Medicaid grew 3.0 percent or 1,500 lives.
In the second quarter, Sierra concluded two hospital provider negotiations. The company has renewed its contractual relationship with the Universal Health Services Inc. facilities in Las Vegas, which currently number four hospitals, with a fifth facility under construction. Additionally, Sierra has renewed its contractual relationship with the University Medical Center (UMC) facility. Both contracts are for a period of three years. Sierra’s hospital provider network continues to include every facility in the Las Vegas market.
During its first quarter earnings conference call, Sierra announced its intent to participate in the growth opportunities afforded under the Medicare Modernization Act. The company will participate in the Medicare Part D Prescription Drug Plan (PDP) and in the expanded Medicare Advantage (MA) plans. The company will continue to offer an MA Health Maintenance Organization plan in the Nevada market, as well as a Regional Preferred Provider Organization (PPO) plan. Sierra plans to offer a Local PPO plan in Nevada, as well as in three counties in Arizona and seven counties in Utah. The company will offer the PDP in up to 10 states in the West.
While numerous factors are yet to be determined, including final rates and the company’s selection as an automatic assigned provider in selected states, Sierra believes that the potential market opportunities with these expanded programs could result in additional 2006 revenue of between $100 to $200 million for the combined MA and PDP programs, with an estimated margin in the range of 5% to 6%. The company expects marketing and implementation costs for these programs to be between $8 million to $10 million for the remainder of 2005, with roughly $2 million to $3 million expensed in the third quarter and the remainder expensed in the fourth quarter.
Based on Sierra’s projected costs associated with the marketing and implementation of the MA and PDP programs, the company now believes it will earn at the lower end of its previously reported 2005 earnings guidance of $3.50 to $3.60 per share.
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