Managed-care provider Healthways (NASDAQ:HWAY) will report second-quarter 2007 financial results on Wednesday, April 4.

What analysts say:

  • Buy, sell, or waffle? There are 16 analysts giving Healthways a checkup, and nine of them say hold, five say buy, and two say sell.
  • Revenues. Revenues are expected to grow a heart-thumping 65% in the quarter, to $165 million.
  • Earnings. Likewise, profits are expected to increase 50% to $0.30 per share.

What management says:
Healthways has been executing the growth plan for its core business quite well, and revenues have steadily increased by around 30% a year for the past few years. Things are getting turbocharged this time around through its acquisitions, like the recently closed Axia deal, which will be adding several quarters' worth of sales to the mix. It also signed up WellPoint (NYSE:WLP) for a new multiyear contract, as well as Humana (NYSE:HUM).

However, there's a large hangover of uncertainty with Healthways' participation in the Medicare Health Support (MHS) program, which requires the company to achieve 5% improvements in cost containment for the population in the pilot program over the life of the three-year contract. In an interim report released back in January, Healthways noted that results were far less than anticipated, which could jeopardize the fees the company has received thus far.

What management does:
It shouldn't be surprising that a company charged with controlling costs at other companies does remarkably well at containing its own costs. Last-quarter costs were reduced because of fewer bonuses being handed out and a renegotiated telecomunications contract. Also, improvement in its medical claims experience "lives under management," the measure of clients that Healthways cares for, has increased substantially and now approaches 2.5 million individuals in its core business, with self-insured employers providing much of the catalyst for growth. With more lives being cared for at reduced cost, margins have been steadily improving.

























All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
As sound as Healthways' business is, I have concerns about its participation in the MHS program and the results that can be achieved there. It had expected to make between $25 million and $28 million in revenues from the program, but only realized $11 million. The problem with the results for the Motley Fool Stock Advisor recommendation could be anything from human error on data to the fact that Washington, D.C.'s population has more intractable chronic illnesses and is less willing to adopt healthy lifestyles than patients Healthways typically deals with. If it doesn't achieve the improvements in cost containment contracted for, the fees it receives -- between $60 million and $90 million -- are "fully at-risk." Until Healthways is able to report improvements in its results there, I'd be leery of investing in the company.

Related Foolishness:

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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.