Shares of eHealth, Inc. EHTH gained 1.2% in yesterday’s trading after the private health insurance exchange announced a cost reduction program. The program is intended to lower the fixed costs of the company that will in turn increase the profit margin.
The program outlines 160 job eliminations, which represent 15% of the company’s total workforce. The program will help eHealth to direct its resources towards growth initiatives in the Medicare related health insurance business and improve profitability of at Individual and Family health insurance.
However, downsizing the workforce will involve pre-tax restructuring charges ranging $3.7–$4.7 million consisting of mainly employee termination benefits and related costs, as well as facility costs and other restructuring charges. eHealth expects to execute the program by the second quarter of 2015 and thus estimates recording most of the restructuring charges in the first and second quarters of 2015. Concurrently, the company expects to begin realizing the effect of these cost-saving actions from the second quarter of 2015.
eHealth witnessed lower-than-expected membership in its individual and family health insurance business and hence decided to lower the fixed costs that largely comprise employee costs in customer care and enrollment, and technology and content groups.
Moreover, due to regulatory changes that impacted Medicare carriers’ compensation of broker channels, about $3 million of Medicare commission revenues were pushed to the first quarter of 2015 from the last quarter. The company expects to book the vast majority of this revenue by the end of March. eHealth also estimates Medicare membership to benefit from approximately 10,000 members that it enrolled during the Medicare annual enrollment period.
In the last reported quarter, eHealth incurred loss of 47 cents per share, which bettered the Zacks Consensus Estimate loss by 17.5%. We expect higher revenues along with lowered costs to help it deliver better numbers in the upcoming quarters. The Zacks Consensus Estimate for the first and second quarters is currently pegged at a loss of 19 cents and earnings of 14 cents, respectively. As analysts incorporate cost reductions in their estimate the Zacks Consensus Estimate is also expected to improve. This in turn will exert an upward pressure on the insurers current Zacks Rank #4 (Sell).
However, better-ranked stocks in the insurance industry include UnitedHealth Group Incorporated UNH, Aetna Inc. AET and Anthem, Inc. ANTM. All these carry a Zacks Rank #2 (Buy).
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