Magellan reports earnings for 2nd quarter down 44%

Managed-care provider warns of lower '02 profit

May 15, 2002|By M. William Salganik | M. William Salganik,SUN STAFF

With its biggest customer, Aetna, losing membership, and with people using more mental health services, Magellan Health Services Inc. reported yesterday that its second-quarter earnings plummeted 44 percent and warned that profit for the rest of the year would be less than it had expected.

Shares of the Columbia-based company fell $2.25, or 28.6 percent, to close at $5.61.

Magellan, which provides managed care in mental health, posted net income for the three months that ended March 31 of $6.3 million, or 14 cents a share. That compares with $11.2 million, or 27 cents a share, in the year-earlier quarter.

Comparing the two quarters is complicated by several factors, the company said. Discounting one-time payments in the year-ago quarter, $3.4 million in restructuring costs this year and changes in accounting regulations, earnings this quarter would have been 16 cents a share, compared with 28 cents in the second quarter last year.

Daniel S. Messina, president and chief executive officer, said he expects the third and fourth quarters this year to be less profitable than had been expected, although better than the first two quarters. He did not give specific projections.

"They've disappointed a number of quarters - that's the problem," said Thomas H. Shinkle, a high-yield debt analyst at Imperial Capital LLC in Beverly Hills, Calif. "They really need to get a handle on medical costs."

Those costs increased 6 percent to 8 percent in the quarter, the company said, almost all a result of people seeking mental health service more often. Mark Demilio, chief financial officer, attributed the increased use of counseling services to the terrorist attacks of Sept. 11.

Melissa Rose, vice president of investor relations, said Magellan indicated last summer that it expected care costs to rise 2 percent to 3 percent and had increased prices 4 percent to 6 percent to cover that cost and improve its profit margin.

Now, the company cannot quickly recover the higher costs by raising prices because only about a third of contracts are renewed each year. Magellan contracts with health plans, governments and employers to provide mental health care, then pays claims for the therapy.

Complicating its problems are those of Aetna Inc., which has been shedding members by leaving unprofitable contracts and markets. Demilio said Magellan had lost about 1.5 million Aetna members, although it had gained almost as many from other customers. Membership is 69.3 million, he said, compared with 69.7 million a year ago.

That was reflected in the top line. Revenue was $437.9 million, down 1.4 percent from $444.2 million in last year's second quarter. Without the one-time payments in the year-earlier quarter, which were adjustments for previous years in a federal contract, revenue would have been $435.5 million.

"When I arrived 18 months ago, I knew we were in for a long transformation," Messina said. "These setbacks, which we faced this quarter, in no way change our direction or our long-term outlook."

He said the company expects further reductions in administrative costs over the next year.

Erin Somers, a company spokeswoman, said it is "too early to tell" whether that will mean layoffs. Magellan had 1,080 employees in Maryland a year ago and has 990 today. Fifty of the job cuts resulted from previously announced layoffs.

Shinkle said he is "cautiously optimistic" that the company can reduce costs and improve profit margins.

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