Health Net Reports Fourth Quarter 2012 GAAP Net Income of $5.1 Million, or $0.06 Per Diluted Share
Western Region Operations and Government Contracts Segments Produce Combined Net Earnings of $0.36 Per Diluted Share in Fourth Quarter 2012
LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYS: HNT) today announced 2012 fourth quarter GAAP net income of $5.1 million, or $0.06 per diluted share, compared with GAAP net income of $60.2 million, or $0.71 per diluted share, for the fourth quarter of 2011.
The 2011 and 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.
The fourth quarter 2012 GAAP results include $20.3 million in Corporate/Other pretax expenses, primarily driven by:
approximately $5.0 million related to the early termination of a medical management contract and approximately $5.2 million for severance expenses; and
approximately $7.1 million in litigation-related expenses.
The company also incurred a $13.8 million pretax loss in the company's Divested Operations and Services segment, resulting primarily from a lease impairment related to the company's divested Northeast business.
The company's Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $29.8 million, or $0.36 per diluted share, in the fourth quarter of 2012 compared with $60.6 million, or $0.72 per diluted share, in the fourth quarter of 2011.
For the full year 2012, Health Net reported GAAP net income of approximately $121.2 million, or $1.46 per diluted share, compared with $72.1 million, or $0.80 per diluted share, for the full year 2011.
The company's Western Region and Government Contracts segments produced combined net income of $85.1 million, or $1.02 per diluted share, for the full year 2012, and approximately $278.7 million, or $3.09 per diluted share, for the full year 2011.
"While the first half of 2012 presented us with challenges, our performance in the second half of 2012 demonstrated stability as we continued to prepare for 2013 and 2014," said Jay Gellert, Health Net's chief executive officer.
"We are reiterating our 2013 earnings per diluted share guidance of $2.00 to $2.10," commented Gellert. "This guidance includes approximately $30 million of operating expenses in preparation for health care reform implementation but excludes any costs related to the company's expected participation in the state of California's duals demonstration."
Health Net's total revenues increased 4.4 percent in the fourth quarter of 2012 to $2.8 billion from $2.7 billion in the fourth quarter of 2011.
Health plan services premium revenues increased by 5.3 percent in the fourth quarter of 2012 to $2.6 billion compared with approximately $2.5 billion in the fourth quarter of 2011.
Health plan services expenses increased by approximately 8.0 percent in the fourth quarter of 2012 to $2.3 billion compared with $2.1 billion in the fourth quarter of 2011.
WESTERN REGION OPERATIONS SEGMENT
Health Plan Membership
Total enrollment in the Western Region at December 31, 2012 was approximately 2.6 million members, a decrease of approximately 1.1 percent from enrollment at December 31, 2011.
Total enrollment in the company's California health plans decreased 1.3 percent from December 31, 2011 to December 31, 2012.
Western Region commercial enrollment at December 31, 2012 was 1.2 million members, a 9.7 percent decrease compared with enrollment at December 31, 2011.
"Membership in our commercial tailored network products continues to grow. We ended the year with approximately 432,000 members in our tailored network products, representing 35 percent of our Western Region commercial membership," said Jim Woys, chief operating officer of Health Net. "We believe these cost-effective products will play a critical role as health care reform is implemented."
Enrollment in the company's Medicare Advantage plans in the Western Region at December 31, 2012 was 234,000 members, an increase of 14.1 percent compared with December 31, 2011.
Medicaid enrollment in California at December 31, 2012 was approximately 1.1 million members, an increase of 75,000 members, or 7.4 percent, from December 31, 2011. This increase was due to both enrollment gains in Medicaid membership and approximately 34,000 new members from the seniors and persons with disabilities (SPD) population.
Total revenues for the Western Region in the fourth quarter of 2012 were $2.6 billion compared with $2.5 billion in the fourth quarter of 2011.
Net investment income for the Western Region was approximately $19.1 million in the fourth quarter of 2012 compared with $10.0 million in the fourth quarter of 2011 and approximately $16.4 million in the third quarter of 2012.
Health Plan Services Expenses
Health plan services expenses in the Western Region were $2.3 billion in the fourth quarter of 2012 compared with approximately $2.2 billion in the fourth quarter of 2011.
Commercial Premium Yield and Health Care Cost Trends
In the Western Region, commercial premiums per member per month (PMPM) increased by 4.3 percent to approximately $376 in the fourth quarter of 2012 compared with $360 in the fourth quarter of 2011.
Commercial health care costs PMPM in the Western Region increased by 7.5 percent to approximately $328 in the fourth quarter of 2012 compared with approximately $306 in the fourth quarter of 2011.
Medical Care Ratios (MCR)
The health plan services MCR in the Western Region was 88.1 percent in the fourth quarter of 2012 compared with 86.3 percent in the fourth quarter of 2011. The full year 2012 Western Region health plan services MCR was 89.1 percent compared with 86.5 percent for the full year 2011.
The Western Region commercial MCR was 87.4 percent in the fourth quarter of 2012 compared with 84.8 percent in the fourth quarter of 2011 and 86.7 percent in the third quarter of 2012. The full year 2012 Western Region commercial MCR was 88.6 percent compared with 85.3 percent for the full year 2011.
"The commercial MCR increased 70 basis points sequentially in the fourth quarter of 2012, primarily due to two factors. First, utilization increased among members in large group accounts that terminated on December 31, 2012. This was expected as part of the repositioning of the commercial book," said Woys. "Also, risk-sharing adjustments with certain providers impacted the commercial MCR. These risk-sharing factors are a result of better than expected performance in our tailored network products throughout 2012."
The Medicare Advantage (MA) MCR in the Western Region was 88.6 percent in the fourth quarter of 2012 compared with 90.5 percent in the fourth quarter of 2011. The full year 2012 MA MCR in the Western Region was 89.6 percent compared with 90.3 percent for the full year 2011.
G&A expense in the Western Region was $235.2 million in the fourth quarter of 2012 compared with $222.1 million in the fourth quarter of 2011. The G&A expense ratio was 8.9 percent in the fourth quarter of 2012 compared with 8.9 percent in the fourth quarter of 2011 and 8.5 percent in the third quarter of 2012.
"The sequential increase in G&A expenses was primarily due to increased marketing costs, consistent with our expectations," commented Woys.
GOVERNMENT CONTRACTS SEGMENT
Government Contracts revenues in the fourth quarter of 2012 were $159.6 million compared with $194.6 million in the fourth quarter of 2011.
Government Contracts expenses in the fourth quarter of 2012 were approximately $136.6 million compared with $155.6 million in the fourth quarter of 2011.
The decrease in revenues and expenses was primarily due to the new Military and Family Life Counseling contract that was effective in the fourth quarter of 2012.
Cash and investments as of December 31, 2012 were approximately $2.2 billion compared with approximately $1.8 billion as of December 31, 2011.
Reserves for claims and other settlements as of December 31, 2012 were $1.0 billion compared with $912.1 million as of December 31, 2011 and $1.0 billion as of September 30, 2012.
Days claims payable (DCP) for the fourth quarter of 2012 was 40.7 days compared with 39.0 days in the fourth quarter of 2011 and 41.6 days in the third quarter of 2012.
On an adjusted1 basis, DCP in the fourth quarter of 2012 was 58.2 days compared with 54.1 days in the fourth quarter of 2011 and 57.7 days in the third quarter of 2012.
The company's debt-to-total capital ratio was 24.3 percent as of December 31, 2012 compared with 26.2 percent as of December 31, 2011 and 24.4 percent as of September 30, 2012.
CASH FLOW FROM OPERATIONS
Operating cash flow was approximately $33.4 million in the fourth quarter of 2012. For the full year 2012, operating cash flow was $32.5 million.
"Operating cash flow in the quarter was greater than net income plus depreciation and amortization," said Joseph Capezza, Health Net's chief financial officer. "Full year 2012 operating cash flow would have been greater than net income plus depreciation and amortization if we excluded the impact of the sale of our Medicare PDP business. The cash benefit of the transaction is reflected in Cash Flows from Investing Activities on the Statement of Cash Flows.
"We expect full year 2013 operating cash flow to be at least equal to our expectations for net income plus depreciation and amortization," said Capezza. "Cash at the parent at December 31, 2012 was approximately $106 million."
DIVESTED OPERATIONS AND SERVICES SEGMENT
The company's Divested Operations and Services segment includes 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. Health Net continues to provide run-out support services for the Northeast business pursuant to claims servicing agreements in place with UnitedHealthcare and its affiliates.
SHARE REPURCHASE UPDATE
For the full year 2012, Health Net repurchased approximately 2.1 million shares of its common stock for approximately $50.0 million at an average price of $24.05 per share. At December 31, 2012, approximately $350 million of authorization under the company's existing $400 million share repurchase program remained.
The following table has specific 2013 guidance metrics. This guidance includes the impact of approximately $30 million of operating expenses related to the implementation of health care reform, but excludes any impact from the company's expected participation in the state of California's duals demonstration.
Commercial: -8% to -9%
Medicaid: +4% to +6%
Medicare Advantage: +1% to +2%
Total health plan membership: -1% to -2%
~$10.7 billion to $11.2 billion
Commercial premium yields PMPM(a)(c)
Commercial health care costs PMPM(a)(c)
~350 basis points < premium yields PMPM
Selling cost ratio(a)
G&A expense ratio(a)
~2.3% to 2.4%
~9.0% to 9.4%
38.0% to 39.0%
Earnings per share
$2.00 to $2.10
For the company's Western Region Operations segment
For the combined Western Region Operations and Government Contracts segments
These estimates are in comparison to reported 2012 amounts.
As previously announced, Health Net will discuss the company's fourth quarter and year-end 2012 earnings results during a conference call on Wednesday, January 30, 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 toll-free)
(855) 859-2056 (Replay - Domestic toll-free)
(706) 643-5711 (International)
(404) 537-3406 (Replay - International)
The access code for the live conference call and replay is 89643769. A replay of the conference call will be available through February 4, 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 will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2011, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012, 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, 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 Health Net's website at www.healthnet.com.
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), or 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 the dual-eligibles pilot programs; 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 Reports 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 the underlying assumptions or forward-looking statements to reflect events or circumstances that arise after the date of this release.
The financial information presented in this press release is unaudited and is subject to change, including as a result of subsequent events or adjustments, if any, arising prior to the filing of the company's Annual Report on Form 10-K for the year ended December 31, 2012.
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
September 30, 2012
December 31, 2011
Small Group and Individual
Small Group and Individual
Small Group and Individual
Total Health Plan Enrollment
Small Group and Individual