Peter O'Neill - VP Public and IR
Anthony Marlon - Chairman and CEO
Marc Briggs - SVP, CFO and Treasurer
Peter Costa - FTN Midwest Securities
Sierra Health Services, Inc. (SIE) Q3 2007 Earnings Call November 6, 2007 12:00 PM ET
Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions) Today's conference is being recorded. And at this time, I'll turn the call over to Mr. Peter O'Neill, Vice President of Public and Investor Relations. Sir, you may begin.
Thank you, operator. Good morning, everyone, and welcome to the third quarter 2007 conference call. With me this morning, as always, is Chairman and Chief Executive Officer, Dr. Anthony Marlon, and Senior Vice President and Chief Financial Officer, Marc R. Briggs.
If you do need to leave the call early today, there will be a replay number available through November 14. In the U.S. that number is 866-457-5713. If you're calling from overseas, it's 203-369-1291.
Again, statements during this presentation that are not historical facts are forward-looking and based on management's projections, assumptions and estimates. Actual results may vary materially. Forward-looking statements are subject to certain risks and uncertainties, which include but are not limited to, potential adverse changes in government relations, contracts and programs, including the Medicare Advantage program, Medicare Prescription Drug Plan, and any potential reconciliation issues; Medicaid and legislative proposals to eliminate or reduce ERISA pre-emption of state laws that would increase potential managed care litigation exposure, competitive forces that may affect pricing, enrollment, renewals and benefit levels, unpredictable medical costs, malpractice exposure, reinsurance costs, changes in provider contracts and inflation, the impact of economic conditions, changes in healthcare reserves, the effects of the termination of the HCA contract, the amount of actual proceeds to be realized from the note receivable related to the sale of the workers' comp insurance operation, and receipt of certain regulatory approvals and the satisfaction or waiver of other conditions pertaining to the proposed merger with UnitedHealth Group. Further factors concerning financial risks and results may be found in documents filed with the SEC and which are incorporated herein by reference.
Consequently, all of the forward-looking statements made in this conference call are qualified by these statements, and there can be no assurance that the actual results or developments anticipated by Sierra will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Sierra or its business or operations. Sierra assumes no obligation to update publicly any such forward-looking statements, whether as a result of new info, future events or otherwise.
The reconciliation of any non-GAAP information presented on this call is contained in our earnings release in Form 8-K, dated November 5, 2007, which may be accessed from the "Investors" page of the Company's website, at www.sierrahealth.com.
I'd now like to turn the call over to Dr. Marlon.
Thank you, Peter. Good morning, all. Let's start with the general update of the pending merger. We again continue to expect the merger to close by the end of the year. We have received all of the required state approvals. We remain in discussions with the Department of Justice and are working through the remaining issues. We believe that we have substantially complied with the second request.
It is our belief that this merger is positive to many involved. It will bring better access to capital, a national network, increased technology, and new products to the market. These are some of the things consumers have been asking us for.
Let's talk about the highlights from the third quarter. We had a good quarter. Our operations continue to perform very well. We earned $0.59 a share for the quarter, which includes an increase to the reserves for the enhanced PDP product of $0.04 a share and an additional $3.2 million in merger-related expenses.
We have continued to focus on our core operations, as our results demonstrate. Nevada, and particularly Las Vegas continued to be a great place to do business, and Jon Bunker and his team are maintaining impressive results and remain focused on our ongoing operations.
Commercial product results: We are up 5,700 lives, or 1.8%, for the quarter. We have added over 18,000 members for the year. This continues to demonstrate the positioning and attractiveness of our product offerings.
Year-to-date, net membership growth has just been under 3%. Net yield increases are in line with our earlier projections of about 4%, excluding the impact of benefit buy-downs. Benefit buy-downs represent an additional 100 basis points, meaning that we expect a net yield increase for the year of approximately 3% blended across all commercial products.
Rate increases, however, in our business renewing during the third quarter were over 8%, before factoring in any benefit or mix changes. We believe our rate increases will be slightly higher in the upcoming months and quarters due to higher trends and increasing costs.
Our HMO retention for the third quarter of '07 came in at 86% and within case group growth came in at 102%. We have seen an increased level of competition in our market, both from fully insured and self-funded products, including some of the national carriers that have not been very active in the market over the past several years.
Commercial HMO bed days for the quarter were high at 248 per 1,000 versus 258 per 1,000 the third quarter of '06, a decrease of 5.4%, but an increase of 4.1% sequentially. Our net pharmacy trend for the commercial HMO business for the quarter was an increase of 10.8% over the third quarter of '06 but was flat compared to last quarter.
On a gross basis, which is the full cost of drugs, including the member share, the trend was an increase of 6.3% over last year's third quarter and down 0.8% sequentially.
On the Medicare front, our Medicare membership, including our local and regional PPO products, at September 30 totaled 59,200 members. For the year, we expect growth in our Medicare HMO product of less than 1%, but, when factoring in our local and regional PPO products, we expect overall Medicare growth to be a little under 2%.
This will be our lowest Medicare growth in many years, as we have been impacted by increased competition across all Medicare product lines. Medicare yields have continued to benefit from the higher than projected risk factor adjusted revenues during '07.
Medicare HMO bed days came in at 1,343 versus 1,228 in the third quarter of '06, an increase of 6.6% and 9.5% sequentially. We have had several extended stays that have impacted this metric. We are very focused on the bed days and expect to see some improvement through the rest of the year.
Let's talk about Medicare PDP and first, we'll talk about our basic plan. On September 30, '07, we had approximately 152,000 basic PDP beneficiaries in the program for the 30 states plus the District of Columbia that we are participating in. The majority of these continue to be auto-enrollees.
This is an expected decrease over the last quarter, as we are not receiving new auto-assigned members from California, where the majority of our current membership resides. Our basic plan continues to perform well. We had pre-tax income of $7.5 million on the product in the quarter.
In 2008, we will be an auto-enrolled sponsor only in the state of Arizona. We will no longer be an auto-enrolled sponsor for California, Colorado, Idaho, Nevada, or in Utah or Washington, as we did not meet the CMS benchmarks for those states for 2008.
Let me talk now about the update, our enhanced product. As we previously discussed, we will incur a significant loss on this product for the year. We have updated our projection based on claims data through September 30, 2007.
The result for the quarter was a net increase to the 2007 estimated premium deficiency of $3.6 million, which was recorded as expense during the quarter. Marc will talk through the components of this later in the call.
Overall, we now expect pre-tax loss of $58.9 million on this product for the year. We did not file with CMS to offer an enhanced product in 2008. This loss is a 2007 event only.
On Medicaid, our membership is up just under 1% for the year, to 57,500, an increase of 500 but is sequentially down 700 members, or 1.2%, for the quarter. We have continued to see a decrease in membership, as the other provider is currently receiving almost all of the new members as allocated from the State of Nevada.
Based on our contract with the State of Nevada, we will continue to see a decline in membership, until our market share falls below 55%, as calculated by the state. Once that occurs, we expect to maintain close to the 55% market share going forward.
Our Medicaid yield has been decreasing during the year based on a shift to a younger average membership, which has been partially offset by a slightly decreasing per member medical expense.
Let's talk about our medical care ratio. Our medical care ratio, excluding the PDP, came in at 78.6% for the quarter, which is a 130 basis point increase compared to the third quarter of '06 and a 310 basis point increase over the previous quarter.
The increase in the ratio for the quarter is due primarily to the higher Medicare bed days and some adverse development we experienced in the quarter related to 2006 claims compared to the positive development experienced last quarter.
A few comments about the Nevada economy: The population in Clark County has now passed 2 million, somewhat of a major milestone. New residents, as counted by driver's license counts, were still over 6,000 in the month of September, but were down from 8,000 one year earlier.
Construction of new hotel/motel rooms and timeshares is estimated to increase room capacity by almost 34,000 rooms by 2011 or over 25% from the current room inventory of 133,000.
These additional rooms are obviously very important to growth with current occupancy rates still averaging well over 90% and near full occupancy on weekends. Visitor volume for August in Clark County was down 0.3% from the same period in '06, at 3.7 million.
As in other parts of the country, we have seen a dramatic change in the housing market in Las Vegas, as many of the areas of the country have experienced. New home sales for August in Clark County were down 50% year-over-year. This excludes high-rise condos and condo conversions.
It is important to remember that Las Vegas positions, its capital list of foreclosures around the country, is due largely to the huge volume of speculative buyers many from out of town, who ramped the market a few years ago and left with homes they never intended to occupy. This will be sorted out over the remaining months.
Keep in mind that our major issue facing the economy, as we go forward, is going to be water. And there's lots of discussion about new pipes, new flows from other parts of the State. This remains an issue that needs to be faced by our politicians.
In summary, we had another strong quarter and operations continue to perform well. We are targeting for an earnings per share of $1.82 to $1.84 for '07, which includes a loss of $0.65 per share on our enhanced PDP offering. Due to the pending merger with the UnitedHealth Group, we are not providing any guidance on 2008 at this time.
I would now like to turn the call over to Marc, who will walk you through some of the additional details.
Thank you, Dr. Marlon. Let me begin by talking about the revenue for the quarter. Medical premiums are up $40.1 million, or 9.9% over the third quarter of 2006. Over $19.2 million of this increase came from the enhanced PDP, which was partially offset by $6.4 million decrease in our basic PDP.
Of the remaining increase, our commercial business contributed $17.2 million, while our Medicare HMO, PPO and Medicare supplemental businesses contributed $13.9 million, with the remainder of the offset coming from our Medicaid business.
Professional fees are down over $900,000 compared to last quarter due to a small decrease in visits to our clinical subsidiaries. We do tend to see some seasonality in the summer months. Investment, and other revenue, is down $1.3 million compared to the third quarter of 2006, and is down $650,000, compared to the second quarter of 2007. The decrease from prior year is primarily due to decreased revenue in our subsidiary that provides a network access services and lower investment income.
Now, I'll take a couple minutes to walk through some of the components of the enhanced plan results for the quarter. We've continued to track the results on the medical and administrative side of the plan very closely. There are three primary items driving additional $3.6 million in expense recorded during the quarter.
The first item is that the utilization trended up during the quarter, which resulted in a $3 million increase in our estimate of the full year medical expense.
The second item to impact the projected loss, relates to pharmacy rebates and how those rebates are factored into the loss share calculation with CMS. During October, we received the final CMS PDP reconciliation for the 2006 plan year on our basic and MAPD plans.
We found in that reconciliation that CMS took the position that all rebates are to be allocated to the basic portion of the benefit, whereas we had recorded our results by apportioning rebates between the basic and enhanced benefits.
By applying all of the rebates to the basic portion of the benefit and, therefore, using them in the risk share calculation, this lowers the net drug spend on the basic benefit and ultimately leads to a lower risk share with CMS. We had been relying on previous plan instructions from CMS for the methodology we were using for this product.
When we adjusted our enhanced plan full year forecast for this item based on the new CMS guideline, it represents an adjustment of almost $6 million. We have formally appealed this with CMS, but we've taken the conservative approach and recorded the additional premium deficiency reserve during the interim.
The next item impacting our projection of the enhanced results is on the administrative side. On our second quarter call, we discussed our collection experience for this product. And based on the information we had available, we adjusted our expectation for uncollectible member premiums and recorded additional expense in the quarter.
We are pleased to report that our collection experience in the third quarter has been much better. And we have been able to reduce our full year estimate of bad debt expense by $5.8 million.
Finally, during the quarter, we also recorded a year-to-date true-up of the G&A and medical expense portions of the premium deficiency reserve. This resulted in a decrease in G&A of $2.5 million and a re-class to increase medical expense by $2.5 million. So, combined with the $5.8 million bad debt adjustment, overall G&A reflects a decrease of $8.3 million for an enhanced plan in the quarter.
There are several components discussed on this product, but the primary takeaways are that the net impact for the quarter is an increase to the projected loss on the product of $3.6 million, and that total G&A benefited by $8.3 million as a result of these adjustments.
Moving on, operating income for the quarter is $51.6 million compared to $55 million for the third quarter of 2006. This includes the Enhanced Plan loss of $3.6 million and $3.2 million in merger-related expenses, which is about $1 million higher than we had built into our forecast.
The medical claims payable balance decreased slightly to $191.1 million from $191.8 million at the end of last quarter. Consistent with our policy, we book reserves using our best estimate. Our estimate is actuarially based and is applied on a consistent basis. Excluding the PDP, our days and claims payable is 48 days, down 1 day from the 49 days reported last quarter and even with the third quarter of last year.
G&A expenses for the quarter are 9.5% of premium revenue, down compared to the 13% last quarter and 12.6% for the third quarter of 2006, as a result of the reduction in the Enhanced Plan premium deficiency of $8.3 million, as discussed. After factoring out the Enhanced Plan adjustment, our G&A ratio still compares favorably to prior periods.
Our tax rate was impacted by certain FIN48 adjustments in the quarter. We expect the rate for the year to be slightly above 34%. Interest expense for the quarter was $600,000. Ongoing expense should be close to this amount.
Operating cash flows were a negative $58.4 million for the quarter, as a result of receiving only two CMS payments in the quarter. Adjusted for the timing of the monthly payments from CMS, operating cash flow was $39.4 million compared to $34.4 million for the same period in 2006.
For the quarter, when adjusted for the timing of payments from CMS, our basic and enhanced PDP products had negative cash flow of $4.6 million and $16.8 million, respectively. We expect the standalone PDP products to be close to cash neutral for the fourth quarter, after factoring in the payment from CMS on the 2006 final reconciliation.
Capital expenditures were $2.9 million for the quarter, compared to $2.3 million last quarter. And again, most of this CapEx is related to the delivery of healthcare or information systems.
We are updating our 2007 guidance to $1.82 to $1.84 per share, which again includes a loss of $0.65 per share on our enhanced PDP offering. And we are not providing 2008 guidance at this time, as a result of the pending merger with UnitedHealth Group.
This concludes our prepared remarks, and we would now like to open up the call for any questions.
Thank you. At this time, we're ready to begin the question-and-answer session. (Operator Instructions) And one moment for our first question.
We do have a question from Peter Costa. You may ask your question. Please state your company name.
Peter Costa - FTN Midwest Securities
FTN Midwest Securities. Hi, guys. Do you want to talk about the higher utilization in the bed days in Las Vegas? Did that have anything to do with switching hospitals from the HCA facilities to other facilities for your Medicare population?
This is Tony. In so far as we are now managing a multitude of hospitals with all of our patients. It has become slightly more difficult to manage the bed days. There is no question about that. I met with some of the medical directors and running around between 10 or 11 hospitals has been certainly much more difficult.
We had a major concentration over at Sunrise, which allowed us to manage that slightly more efficiently. So, I would think that some of those days, 2% or 3% of the increase probably is related to the inefficiency of having to do multiple hospitals. But that is probably the only element that contributes to the increase. We have had some very, very sick patients with very long stays that account for the higher than average bed days.
Peter Costa - FTN Midwest Securities
Okay. And in terms of the merger with United, anything, at this point, you can talk about regarding timing and expectations at this point? I mean, you said by the end of the fourth quarter, but, is that November or December? I mean: you must be pretty close now with the second request being done.
Every time I make a comment about it, I'm proven wrong. I would tell you that we certainly expect that within the next 45 days to have a clearer picture of what's happening, and hope certainly to have an announcement before the end of the year.
Peter Costa - FTN Midwest Securities
What remains as the issues? Can you talk about that?
Everybody is shaking their heads: “We can”. Obviously, there are obvious issues. The Medicare is the one, and that seems to be the major concern, and we are dealing with it as best we can.
Peter Costa - FTN Midwest Securities
Okay. Thank you very much.
Thank you. (Operator Instructions)
And at this time, I'm showing no further questions. I'll turn the call back over to Mr. O'Neill for closing remarks.
Thank you, operator. For those of you who joined the call late, there is a replay number available in the US until November 14th. That number is 866-457-5713, if you're calling overseas, 203-369-1291. Marc Briggs and I will also be available for any follow-up questions you have after the call. Thank you.
Thank you. And this does conclude today's conference. We thank you for your participation. At this time, you may disconnect your lines.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!