Health Net Reports Second Quarter 2013 GAAP Net Income of $33.5 Million, or $0.42 Per Diluted Share

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Health Net Reports Second Quarter 2013 GAAP Net Income of $33.5 Million, or $0.42 Per Diluted Share

Western Region Operations and Government Contracts Segments Produce Combined Net Income of $0.52 Per Diluted Share


LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYS: HNT) today announced 2013 second quarter GAAP net income of $33.5 million, or $0.42 per diluted share, compared with $124.6 million, or $1.48 per diluted share, for the second quarter of 2012.

The company's second quarter 2012 financial results included in this release and the attached financial tables reflect the treatment of the company's Medicare stand-alone Part D (Medicare PDP) business that was sold on April 1, 2012, as discontinued operations. In the second quarter of 2012, the company recorded a $119.4 million net gain, or $1.42 per diluted share, from the sale of the Medicare PDP business.

The second quarter 2013 GAAP results include approximately $12.9 million in Corporate/Other pretax expenses, primarily severance costs resulting from the company's continuing efforts to address scale issues.

The company's Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $41.4 million, or $0.52 per diluted share, in the second quarter of 2013 compared with $15.9 million, or $0.19 per diluted share, in the second quarter of 2012.

Highlights from the second quarter of 2013 include:

  1. the commercial medical care ratio (MCR) continued to improve as a result of the company's efforts to reposition its commercial book, lower health care costs and the absence of adverse prior period reserve development in the second quarter of 2013;
  2. the Medicare Advantage (MA) MCR improved sequentially and quarter-over-quarter primarily due to lower health care cost trends;
  3. the Medicaid MCR improved sequentially and quarter-over-quarter as a result of better performance in the company's Seniors and Persons with Disabilities (SPDs) membership and the impact of reinstated California Medicaid premium taxes on premium revenues;
  4. the company was selected to participate in 13 regions in Covered California, the California individual health insurance exchange, and in Cover Oregon, the Oregon individual health insurance exchange, with coverage in both states scheduled to begin on January 1, 2014;
  5. CalPERS selected Health Net tailored network HMO products as part of its offerings to its members effective January 1, 2014; and
  6. as part of its budget process, the state of California reinstated Medicaid premium taxes on June 27, 2013, retroactive to July 1, 2012. This raised the company's general and administrative (G&A) ratio by 120 basis points to 11.0 percent and lowered the Medicaid MCR by 510 basis points in the second quarter of 2013. The reinstated Medicaid premium taxes and related incremental premium revenue did not impact pretax or net income in the second quarter of 2013.

"We produced solid operating improvement in each line of business in the second quarter of 2013. G&A costs were higher than our expectations primarily due to the reinstated Medicaid premium tax expenses and increased spending to prepare for health care reform and the implementation of California's Coordinated Care Initiative," said Jay Gellert, Health Net's chief executive officer.

"We believe we can sustain our current operating performance throughout the remainder of this year. For the full year 2013, we now expect GAAP earnings per diluted share of $2.10 to $2.20. In addition, we expect full year 2013 earnings per diluted share from the combined Western Region and Government Contracts segments to be in a range of $2.20 to $2.30 despite higher G&A expenses that now include costs to prepare for the state of California's Coordinated Care Initiative," Gellert added.

CONSOLIDATED RESULTS

Health Net's total revenues decreased 3.6 percent in the second quarter of 2013 to $2.7 billion from $2.8 billion in the second quarter of 2012.

Health plan services premium revenues decreased by 1.5 percent from the second quarter of 2012 to approximately $2.6 billion in the second quarter of 2013.

Health plan services expenses decreased 7.1 percent to approximately $2.2 billion in the second quarter of 2013 compared with $2.4 billion in the second quarter of 2012.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2013 was approximately 2.5 million members, a decrease of 3.2 percent from enrollment at June 30, 2012.

Total enrollment in the company's California health plans at June 30, 2013 decreased 1.7 percent from enrollment at June 30, 2012.

Western Region commercial enrollment at June 30, 2013 was approximately 1.1 million members, a decrease of 11.6 percent compared with enrollment at June 30, 2012.

"The decrease in our commercial membership was primarily the result of the repositioning of our commercial book away from larger accounts," said Jim Woys, Health Net's chief operating officer.

Membership in tailored network products represented 37.3 percent of the company's Western Region commercial membership at June 30, 2013 compared with 35.2 percent at June 30, 2012. In California, enrollment in small group tailored network products grew by 11.5 percent from June 30, 2012 to June 30, 2013.

"We believe the affordability of our tailored network products continues to attract small group customers," said Woys. "We believe this positions us well as we prepare for the exchanges in 2014."

Enrollment in the company's MA plans was 236,000 members at June 30, 2013, which represents a 3.5 percent increase compared with enrollment of 228,000 members at June 30, 2012.

Medicaid enrollment increased 5.5 percent to 1.1 million members at June 30, 2013 compared with June 30, 2012.

Revenues

Total revenues in the Western Region declined 2.0 percent from $2.7 billion in the second quarter of 2012 to approximately $2.6 billion in the second quarter of 2013.

Net investment income in the Western Region was $17.1 million in the second quarter of 2013 compared with $24.7 million in the second quarter of 2012 and $29.6 million in the first quarter of 2013. The company recorded $5.6 million in realized investment gains in the second quarter of 2013 compared with $12.4 million in the second quarter of 2012.

The company expects investment income in 2013 of approximately $70 million compared with previous expectations of approximately $80 million due to lower anticipated realized investment gains in the second half of 2013.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.2 billion in the second quarter of 2013 compared with approximately $2.4 billion in the second quarter of 2012.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 2.0 percent to $380 in the second quarter of 2013 compared with $373 in the second quarter of 2012.

Commercial health care costs PMPM in the Western Region decreased by 2.3 percent to approximately $323 in the second quarter of 2013 compared with $331 in the second quarter of 2012.

"The changing mix of our commercial business to tailored network products and a shift away from large employer group accounts continued to produce improvement in our commercial premium yields to health care costs spread and is consistent with our outlook," said Woys.

Medical Care Ratios

The health plan services MCR in the Western Region was 85.0 percent in the second quarter of 2013 compared with 90.1 percent in the second quarter of 2012.

The Western Region commercial MCR was 84.9 percent in the second quarter of 2013 compared with 88.7 percent in the second quarter of 2012.

The MA MCR in the Western Region was 89.9 percent in the second quarter of 2013 compared with 92.0 percent in the second quarter of 2012. The 210 basis point improvement in the MA MCR was consistent with the company's expectations.

The Medicaid MCR was 79.5 percent in the second quarter of 2013 compared with 91.3 percent in the second quarter of 2012. In addition to the impact of the reinstated Medicaid premium tax revenue, the company noted that the Medicaid MCR in the second quarter of 2013 also benefited from improved performance of its SPD population due to moderating health care cost trends.

Consistent with its historical practice, the state of California increased the company's Medicaid premium revenues by the same amount, $35.7 million, as the company's Medicaid premium tax expense. Approximately $25.4 million of Medicaid premium revenue recorded in the second quarter of 2013 was attributable to the nine months ended March 31, 2013, with the balance of approximately $10.3 million attributable to the second quarter of 2013. The $35.7 million in additional Medicaid premium revenue favorably impacted the Medicaid MCR by 510 basis points in the second quarter of 2013.

G&A Expenses

G&A expense in the Western Region was $284.1 million in the second quarter of 2013 compared with $218.7 million in the second quarter of 2012 and $245.2 million in the first quarter of 2013. The G&A expense ratio was 11.0 percent in the second quarter of 2013 compared with 8.3 percent in the second quarter of 2012 and 9.3 percent in the first quarter of 2013.

The reinstated Medicaid premium tax expense was recorded in G&A expenses. In the second quarter of 2013, this expense was approximately $35.7 million, of which approximately $25.4 million is attributable to the nine months ended March 31, 2013 and approximately $10.3 million is attributable to the second quarter of 2013.

"We are increasing our full year 2013 guidance for the G&A ratio by approximately 100 basis points to a range of 10.0 percent to 10.5 percent due to three factors," said Woys. "First, we expect the impact from the reinstatement of California Medicaid premium taxes to be approximately $70 million for the full year 2013. In addition, for the full year 2013, we expect to spend approximately $20 million in preparation for the California Coordinated Care Initiative and approximately $10 million to prepare for other future opportunities, including our participation in Arizona Medicaid and CalPERS."

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $139.9 million in the second quarter of 2013 compared with $176.2 million in the second quarter of 2012.

Government Contracts expenses were $121.8 million in the second quarter of 2013 compared with $152.7 million in the second quarter of 2012.

"We now expect Government Contracts' full year 2013 pretax income to be in a range of approximately $55 million to $60 million, primarily due to certain adjustments pursuant to our TRICARE contract," said Woys.

BALANCE SHEET

Cash and investments as of June 30, 2013 were $1.9 billion compared with $2.1 billion as of June 30, 2012.

Reserves for claims and other settlements were $1.0 billion as of June 30, 2013 compared with $1.0 billion as of June 30, 2012 and $1.1 billion as of March 31, 2013. The sequential decline was due to provider shared-risk payments of approximately $23.0 million and a claims inventory reduction of $58.0 million.

Days claims payable (DCP) for the second quarter of 2013 was 42.1 days compared with 39.0 days in the second quarter of 2012 and 43.5 days in the first quarter of 2013.

On an adjusted1 basis, DCP in the second quarter of 2013 was 58.4 days compared with 54.3 days in the second quarter of 2012 and 62.1 days in the first quarter of 2013. The sequential decline in GAAP and adjusted DCP was due to the sequential decline in reserves for claims and other settlements.

The company's debt-to-total capital ratio was 25.6 percent as of June 30, 2013 compared with 24.6 percent as of March 31, 2013 and 24.1 percent as of June 30, 2012. The increase in the debt-to-total capital ratio was primarily due to a $25.0 million increase in the company's borrowings under its revolving credit facility during the second quarter of 2013.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $106.3 million in the second quarter of 2013. The negative operating cash flow was primarily the result of delayed June 2013 Medicaid payments of approximately $121.5 million, a claims inventory reduction of approximately $58.7 million and provider shared-risk payments of approximately $23.4 million. The company noted that it received the June Medicaid payments in early July 2013.

"We continue to expect operating cash flow for the full year to be at least equal to net income plus depreciation and amortization," said Joseph Capezza, Health Net's chief financial officer.

The company noted that cash at the parent was approximately $7.0 million at June 30, 2013.

DIVESTED OPERATIONS AND SERVICES SEGMENT

The company's second quarter 2012 financial results for its Divested Operations and Services segment included in this release and the attached financial tables include items related to the run-out of the Northeast business and transition-related revenues and expenses related to the Medicare PDP business that was sold on April 1, 2012.

2013 GUIDANCE

The following table has specific 2013 guidance metrics.

Metric

   

2013 Guidance

   

Year-end membership(a)(c)

Commercial: -8% to -9%
Medicaid: +4% to +6%
Medicare Advantage: +1% to +2%
 
    Total health plan membership: -1% to -2%
 

Consolidated revenues(b)

   

~$10.7 billion to $11.2 billion

 

Commercial premium yields PMPM(a)(c)

   

~ +2.0%

 

Commercial health care costs PMPM(a)(c)

   

~ 460 basis points < premium yields PMPM

 

Selling cost ratio(a)

~2.3% to 2.4%
 

G&A expense ratio(a)

~10.0% to 10.5%
    (previously: ~9.0% to 9.4%)
 

Tax rate(b)

38.0% to 38.5%

 

   (previously: 38.0% to 39.0%)
 
Weighted-average fully~80.0 million to 81.0 million
diluted shares outstanding   (previously: ~80.0 million)
 
GAAP EPS$2.10 to $2.20
(previously: $2.20 to $2.30)
 
Western Region and$2.20 to $2.30
Government Contracts EPS    
(a) For the company's Western Region Operations segment
(b)For the combined Western Region Operations and Government Contracts segments
(c)These estimates are in comparison to reported 2012 amounts.
 

CONFERENCE CALL

As previously announced, Health Net will discuss the company's second quarter 2013 financial results during a conference call on Thursday, July 25, 2013, beginning at approximately 11:00 a.m. Eastern time. The conference call should be accessed at least 15 minutes prior to its start with the following numbers:

(866) 393-1637 (Domestic)     (855) 859-2056 (Replay - Domestic)
(706) 643-5711 (International)(404) 537-3406 (Replay - International)
 

The access code for the live conference call and replay is 99882018. A replay of the conference call will be available through July 30, 2013. A live webcast and replay of the conference call also will be available at www.healthnet.com under "Investor Relations." The conference call webcast is open to all interested parties. Anyone listening to the company's conference call or webcast will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2012, Quarterly Report on Form 10-Q for the quarter ended March 31, 2013, and other reports filed by the company from time to time with the Securities and Exchange Commission.

ABOUT HEALTH NET

Health Net, Inc. is a publicly traded managed care organization that delivers managed health care services through health plans and government-sponsored managed care plans. Its mission is to help people be healthy, secure and comfortable. Health Net provides and administers health benefits to approximately 5.4 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as "Part D"), Medicaid, U.S. Department of Defense, including TRICARE, and Veterans Affairs programs. Through its subsidiaries, Health Net also offers behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, managed health care product coordination for multi-region employers, and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company's website at www.healthnet.com.

CAUTIONARY STATEMENTS

Health Net, Inc. and its representatives may from time to time make written and oral forward-looking statements within the meaning of the Private Securities Litigation Reform Act ("PSLRA") of 1995, including statements in this and other press releases, in presentations, filings with the Securities and Exchange Commission ("SEC"), reports to stockholders and in meetings with investors and analysts. All statements in this press release, other than statements of historical information provided herein, including the guidance for future periods and the assumptions underlying such projections, may be deemed to be forward-looking statements and as such are intended to be covered by the safe harbor for "forward-looking statements" provided by PSLRA. These statements are based on management's analysis, judgment, belief and expectation only as of the date hereof, and are subject to changes in circumstances and a number of risks and uncertainties. Without limiting the foregoing, the guidance as to expected future period results and statements including the words "believes," "anticipates," "plans," "expects," "may," "should," "could," "estimate," "intend," "feels," "will," "projects" and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied or projected by the forward-looking information and statements due to, among other things, health care reform and other increased government participation in and regulation of health benefits and managed care operations, including the ultimate impact of the Affordable Care Act, which could materially adversely affect Health Net's financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs), and require changes to the ways in which Health Net does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts and other risks and uncertainties affecting Health Net's Medicare or Medicaid businesses; Health Net's ability to successfully participate in California's Coordinated Care Initiative, the Covered California health insurance exchange and/or Arizona's Medicaid program; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care, the Centers for Medicare & Medicaid Services, the Office of Civil Rights of the U.S. Department of Health and Human Services and state departments of insurance; operational issues; failure to effectively oversee our third-party vendors; noncompliance by Health Net or Health Net's business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; liabilities incurred in connection with Health Net's divested operations; impairment of Health Net's goodwill or other intangible assets; investment portfolio impairment charges; volatility in the financial markets; and general business and market conditions. Additional factors that could cause actual results to differ materially from those reflected in the forward-looking statements include, but are not limited to, the risks discussed in the "Risk Factors" section included within Health Net's most recent Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q filed with the SEC and the other risks discussed in Health Net's filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, Health Net undertakes no obligation to address or publicly update any of its guidance, the assessment of underlying assumptions or forward-looking statements to reflect events or circumstances that arise after the date of this press release.

The financial information presented in this press release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013.

1 See "Disclosures Regarding Non-GAAP Financial Information" attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

Health Net, Inc.
Enrollment Data - By State
(In thousands)
            Change from
March 31, 2013   June 30, 2012
June 30,March 31,June 30,Increase/   %   Increase/   %
201320132012(Decrease)Change(Decrease)Change
California
Large Group608628745(20)(3.2)%(137)(18.4)%
Small Group and Individual339   325   303   14    4.3%   36    11.9%
Commercial Risk9479531,048(6)(0.6)%(101)(9.6)%
Medicare Advantage14614314132.1%53.5%
Medi-Cal   1,118   1,100   1,060   18    1.6%   58    5.5%
Total California   2,211   2,196   2,249   15    0.7%   (38)   (1.7)%
 
Arizona
Large Group646984(5)(7.2)%(20)(23.8)%
Small Group and Individual56   57   61   (1)   (1.8)%   (5)   (8.2)%
Commercial Risk120126145(6)(4.8)%(25)(17.2)%
Medicare Advantage   43   43   43   0    0.0%   0    0.0%
Total Arizona   163   169   188   (6)   (3.6)%   (25)   (13.3)%
 

Northwest

Large Group23213229.5%(9)(28.1)%
Small Group and Individual43   45   56   (2)   (4.4)%   (13)  Read Full Story

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