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Magellan's earnings halved as costs surged


By Rachel Landen
Posted: March 3, 2014 - 6:45 pm ET
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Despite a boost in revenue, Magellan Health Services reported that its fourth-quarter earnings were cut in half as the Avon, Conn., healthcare management company's costs soared during the quarter.

And the recent loss of a contract to provide behavioral health or substance abuse services to mentally ill children and adults in the Phoenix area threatens to cut a segment of Magellan's future earnings. Since Sept. 1, 2007, Magellan has held a contract with Maricopa County to provide services which generated net revenue of $755 million in 2013. But in March of last year, as the contract was set to expire, the state of Arizona awarded the mental health contract to another vendor.

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Magellan has since filed a protest and several appeals, challenging the way in which the Arizona Department of Health Services scored the contract proposals and awarded it jointly to Mercy Care Plan and Maricopa Integrated Health System. But the state is moving ahead with its new contract, which could mean a hit to Magellan's revenue as early as the first quarter of 2014.

Magellan's revenue had been climbing for all of 2013, but for the final three months its net income fell.

Acquisitions accounted for revenue reaching $1.01 billion, compared to $830.3 million in the year-ago quarter. Magellan added Partners Rx Management, a pharmacy benefits management company, and AlphaCare of New York, a Medicaid managed long-term-care HMO and Medicare plan, to its portfolio.

“Magellan Health Services is a very different company today than it was a year ago,” Chairman and CEO Barry Smith told investors during a Monday morning call. “While our core businesses continue to perform admirably, we've made significant advancements in our two strategic initiatives.”

But the expansion of its business and development of new product and service lines, along with an increase in other costs, contributed to the slash in profits. Cost of care was up 15% and cost of goods sold more than doubled. Magellan reported fourth-quarter net income of $18.5 million, down from $37 million a year ago.

Even as Magellan ended the year on a disappointing earnings note, Smith expressed optimism for the coming year. “Although 2014 will be a transitional year after the progress we've made in 2013 on our strategic initiatives, we are poised for future long-term growth,” Smith said. “We are a more competitive company, better prepared to serve our customers and shareholders in the dynamic and changing healthcare market.”

Follow Rachel Landen on Twitter: @MHrlanden


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