Tuesday, August 26, 2008

News and Commentary About Healthways: Lead or Follow?

Uh oh. That regular ritual known as the ‘earnings forecast’ has precipitated some chaos in Healthways’ stock price. If you go to the Healthways ‘News and Events’ site, an otherwise ho-hum press release announcing a change in the fiscal year to a calendar basis and on-target expected price earnings for this year concluded with this telling paragraph [bolding added]:

‘Healthways today establishes its guidance for earnings per diluted share for the three months ending November 30, 2008, in a range of $0.34 to $0.37, which would represent an increase of 13% to 23% from the three months ended November 30, 2007. Mr. Leedle added, "While this guidance anticipates solid earnings growth from the comparable prior-year period, the sequential-quarter performance reflects a decline in revenue due to the impact of certain contract renegotiations, reduced revenues associated with the winding down of a previously discussed contract terminating at the end of calendar 2008 and the full-quarter effect of small contract losses due to health plan consolidation. This earnings guidance also anticipates incremental costs associated with the implementation of contracts scheduled to begin on January 1st.’

According to the flurry of news reports hitting the Disease Management Care Blog’s in-box, the expectations of earnings of 34 to 37 cents per share for the quarter ending November 30 contrasts quite unfavorably with the street’s expectations of 46 cents a share. Shareholders got grumpy and sold sold sold, provoking a 20% stock price drop, to its lowest level since the fall of 2003.

In scanning the news reports, shareholders apparently believe face-to-face care models are in the ascent and strapped insurers are ironically pushing back over the pricing of Healthways’ suite of services, especially ‘optional’ wellness and prevention programs. While overseas contracts may be a bright spot, they just ain’t enough to overcome the spectre of lower pricing and commoditization. Investors are looking for fatter return on their capital.

On the other hand, the Disease Management Care Blog notes that one quarter does not a long term investment make, and that the November 30 quarter is being buffeted by the an unfortunate combination of contract terminations and new program installs. The DMCB’s prior posts have been generally bullish on the folks from Franklin. However, that long (really long!) bullishness is based on three predictions - that the DMCB is still hanging tough on:

a) the population-based disease management ‘story’ is still being told and it'll take many more quarters-chapters before we know how this will sort out, and

b) once the high-touch medical home pilots show just how hard it is to reduce costs, disease management will look more attractive because…

c) models that combine the best of remote behaviorally-based disease management and clinically centered medical home will emerge, especially as synergistic insurance benefits are created (a naive yet conceptually simple example: waived co-pays for care of chronic illness) and the EHR finally shows demonstrable value (simple example: automatic test ordering and notification for all persons meeting tailored criteria for the diagnosis of a chronic condition).

The question for the leadership at Healthways: do you want to lead the way or follow in developing new links in the quality-cost value chain? The slump in your share price suggests so far that investors suspect it's the latter.

Image from Forbes

No comments: