For investors in managed health-care company Amerigroup (NYSE:AGP), it must be tough to enjoy an otherwise excellent earnings report with a sword of Damocles hanging over their head.
As membership rolls rose and premiums surged, the managed-care company for poor customers on public assistance programs saw profits more than double. Earnings rose to $29.9 million, more than twice as high as last year's $12.9 million. Revenues were up 31% as well, to $809.7 million. If you exclude some one-time gains Amerigroup recorded, it earned $0.40 per share, considerably more than the $0.36 analysts had forecast.
Those healthy numbers were driven in part by a greater-than-16% jump in membership. While fellow managed-care provider Coventry Health Care (NYSE:CVH) also saw a rush of new members, UnitedHealth (NYSE:UNH) and Wellpoint (NYSE:WLP) are seeing sickly times. Amerigroup's membership grew to 1.3 million members during the quarter, and it plans on rolling out new initiatives in four separate areas of Georgia this year.
That's good news all around, but it may come to naught, thanks to that looming sword we mentioned earlier.
Amerigroup was found guilty in a whistleblower lawsuit last year and fined $48 million. Under federal law, however, that sum was tripled to $144 million. While Amerigroup is naturally appealing the decision, the triple-sized fines alone amount to 93% of the company's unregulated cash, and the penalty phase of the litigation hasn't even been concluded yet. With Amerigroup guilty of more than 18,000 individual false claims, the company could be on the hook for as much as $524.7 million. Each claim carries a penalty of as much as $11,000 at the federal level, and $10,000 at the state.
Of course, the appeals process could overturn the ruling, and Amerigroup might owe nothing. Somehow, though, when you're found guilty of evading coverage for poor pregnant women -- regardless of how righteous your reasons might sound in your own head -- your probability of winning seems mighty slim. While it might not pay the full half-billion liability, you should assume that Amerigroup will pay something. It's equally troubling that Amerigroup hasn't even begun setting aside anything in reserve.
The quarter showed that Amerigroup has the potential to produce outstanding results. Yet it's hard to recommend Amerigroup as an investment right now, until that sword no longer lurks above the company's head.
Amerigroup and UnitedHealth are recommendations of Motley Fool Stock Advisor. UnitedHealth is also an Inside Value selection. Whatever your investing style, the Fool has a newsletter for you.
Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
