By William Trent, CFA of Stock Market Beat
Sierra Health Services, Inc. (SIE) today announced that it expects to incur a loss in its 2007 fiscal year from the enhanced version of its Medicare Part D Prescription Drug Program (PDP) product offering. Based on its claims experience for the month of January, Sierra expects pharmacy costs on this product to be higher than previously projected. For the month of January, the only month for which full claims data is currently available, the Company has incurred pre-tax losses of approximately $3 million, or $2 million after tax, from the enhanced product. After completing discussions with the Centers for Medicare and Medicaid Services (CMS) and analyzing data, including additional claims history, Sierra expects to develop a best estimate of the losses associated with the enhanced product and record a premium deficiency reserve in the first quarter, for the entire 2007 period. This best estimate is expected to be developed within the next 45 to 60 days.The Company’s earnings per share guidance for 2007 did not include a contribution from the enhanced PDP product. Sierra remains comfortable with its original guidance of $2.30 to $2.40 per diluted share, excluding the expected impact of losses for this enhanced product.
Given that the company’s initial estimate of the cost (the one they used to set their premiums) was off by so much, it is only natural that the company wants to take its time figuring out the full-year impact. But given the $2 million after-tax loss in January, allow us to hazzard a guess that the full year impact will be approximately 12 x $2 million, or $24 million. If we use that as the over/under, the per-share impact would be about $0.42.
On this announcement the stock fell just 4.5%, which could suggest that:
- The market believes the impact will be less than $0.42 this year
- The company will be able to raise prices and recover the losses in future years
There may also be other explanations, which we would be happy to hear.
The author may hold a position in the securities discussed. The author’s current holdings are as follows: Long: Union Pacific (UNP) put options; Air Products (APD) put options; Bookham (BKHM; Ballard Power (BLDP); Syntax Brillian (BRLC); CMGI (CMGI); Genentech (DNA); Ion Media Networks (ION); Three Five Systems (TFS); IShares Japan (EWJ); StreetTracks Gold (GLD); Starbucks (SBUX); U.S. Oil Fund (USO); Plantronics (PLT) call options; Short: Landstar (LSTR) put options; Plantronics (PLT) put options
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