Monday, November 3, 2008

A Penny for the DMCB's Thoughts on Healthways' Earnings Miss

In a prior post, the Disease Management Care Blog promised follow-up on Healthways’ last quarter earnings report. Even though there was a considerable jump in income accompanied by an earnings increase from 31 to 49 cents a share, earnings per share still missed the Street’s expectations by one cent. That's right, a penny. That was enough to reward the company with a continued stock price slump into the $10 range, where it’s been languishing plus or minus a dollar since ever since.

Does this fine company deserve to be hammered over such a small earnings misstep? Maybe not, but reports on Healthways (here and here) seem to be using the penny as chance to fret over the long term prospects for the company:
  • With Democratic control of the Presidency and Congress likely, Medicare Advantage plans are destined to get squeezed. As a result, they’ll have less to spend on disease management.
  • The bad news from Medicare Health Support lessens the short term likelihood of a Medicare contract and could batter Healthways’ ability to assure its commercial customers that it truly has the goods to reduce claims expense.
  • Health Plans have the ability to bring programs in house, further undercutting Healthways’ long term business prospects.
  • The balance sheet is described as highly leveraged with considerable debt vs. cash on hand.

As an aside, the DMCB notes Healthways has also brought in a new chief operating officer. Is that an indication that management or the Board of Directors is happy with the course of the company?

While it agrees with most of the points above, the DMCB also thinks companies like Healthways may be struggling because they haven’t adjusted their business model to being better, faster, cheaper or complementing the medical home, helping patients navigate increasingly complicated insurance benefits (like CDHPs), tackling pharmacy issues, integrating their information systems with electronic health records and being fully transparent about showing what works and what doesn’t work.

The DMCB disagrees, however with the notion that Health Plans have a ready ability to bring disease management (DM) in house:

First off, the number of telephonic health coaches (usually nurses) and accompanying IT support represents a considerable expense. Outside full service DM companies can scale DM far more efficiently. If DM can cut their costs and lower their prices – which they’ve resisted to date – health plans will find outsourcing to be the better alternative. The likelihood of this will grow with increasing regulation of insurers' administrative expenses.

Secondly, health plans are first and foremost insurance companies. In most managed care organizations, clinical programs like ‘disease management’ hold a second fiddle to core activities such as building surplus, meeting State regulatory requirements, underwriting, managing claims and managing the ‘float.’ Leaders in health insurance have little loyalty to programs that many feel should be borne by the health care system and are outside their management comfort zone.

And this will get worse. Because of the advent of health savings accounts, insurers like Wellpoint want to also be banks. According to Federal Reserve and FDIC, a mix of insurance and banking with clinical services are permissible just so long as ‘subsidiary’ companies (like HMC, wholly owned by Wellpoint) don’t pose a substantial risk to their parent companies. Increasing expense or distraction from managing these subsidiary functions over the long run may well prompt insurer/bankers/financiers to spin this off or return to outsourcing it.

Ultimately, the DMCB thinks insourcing and outsourcing DM will continue in faddish waves. Right now, Plans seem to be more interested in insourcing. There is no guarantee that will continue, especially if the DM industry can adapt to these changing times and respond with a more efficient modern approach to chronic care for populations at a more attractive price point.

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