Ben Leedle, Chief Executive Officer of Healthways, acknowledged on the first-quarter 2009 earnings call that the health-management program administrator lost $70 million in revenue due to terminated contracts, renegotiations at less favorable terms, and delayed purchasing decisions by certain customers. Healthways, which runs wellness and disease-prevention programs targeting fitness, weight management, alternative medicine and smoking cessation, failed to mention that it could also be forced to reverse millions in already-booked performance-contract fees, according to the 10-Q regulatory filing:
- During the settlement process under a contract, which generally occurs six to eight months after the end of a contract year, we settle any performance-based fees and reconcile healthcare claims and clinical data. As of November 30, 2008, performance-based fees that have not yet been settled with our customers but that have been recognized as revenue in the current and prior years totaled approximately $47.9 million.
Performance-based contracts that provide that a portion (up to 100%) of billable fees may be refundable to the customer if the programs do not achieve, when compared to a baseline year, a targeted percentage reduction in the customer’s healthcare costs are not usually recognized as revenues but instead recorded in a current liability account entitled “contract billings in excess of earned revenue” ($75.3 million at November 30).
Leedle cautioned analysts on the conference call that the company did not yet know the effect that unemployment will have on billed lives, but using a three-percent attrition rate, another $20 million in top-line growth could disappear. Going forward, based on existing assumptions and possibly no organic growth in customers membership-wise, Healthways could be starting with a decline of approximately $90 to $100 million in run rate revenues for 2009 — which does not include the $47.9 million in recognized revenue still subject to data reconciliation.
