Health Net Reports First Quarter 2013 Net Income of $50.1 Million, or $0.62 Per Diluted Share

Health Net Reports First Quarter 2013 Net Income of $50.1 Million, or $0.62 Per Diluted Share

Improvement in Commercial First Quarter Performance and Full-Year Outlook Drives Increase in 2013 Earnings Per Diluted Share Guidance to $2.20 to $2.30

LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYS: HNT) today announced 2013 first quarter GAAP net income of approximately $50.1 million, or $0.62 per diluted share, compared with GAAP net loss of $26.6 million, or a loss of $0.32 per share, for the first quarter of 2012. Earnings in the first quarter of 2012 for the combined Western Region Operations (Western Region) and Government Contracts segments were $8.2 million, or $0.10 per diluted share.


The 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.

"We are pleased with our 2013 first quarter results, especially the improvement in our commercial performance," said Jay Gellert, Health Net's chief executive officer. "As a result of our efforts to reposition our large group commercial business going into 2013 and stronger overall commercial performance driven by lower utilization, we are raising full year 2013 earnings per diluted share guidance to a range of $2.20 to $2.30."

CONSOLIDATED RESULTS

Health Net's total revenues decreased approximately 1.2 percent from the first quarter of 2012 to approximately $2.8 billion in the first quarter of 2013.

Health plan services premium revenues of approximately $2.6 billion in the first quarter of 2013 were essentially flat compared with the first quarter of 2012.

Health plan services expenses of approximately $2.3 billion in the first quarter of 2013 decreased by 3.2 percent compared with the first quarter of 2012.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at March 31, 2013 was approximately 2.5 million members, a decrease of 2.8 percent from enrollment at March 31, 2012.

Total enrollment in the company's California health plans at March 31, 2013 decreased approximately 1.5 percent compared with March 31, 2012.

Western Region commercial enrollment was approximately 1.1 million members at March 31, 2013, a decrease of 11.2 percent compared with enrollment of approximately 1.3 million members at March 31, 2012, and a decrease of 7.1 percent from December 31, 2012.

Membership in tailored network products represented 37.1 percent of the company's Western Region commercial membership at March 31, 2013 compared with 35.0 percent at March 31, 2012. In California, enrollment in small group tailored network products grew by 10.7 percent from March 31, 2012 to March 31, 2013.

"Total California small group and individual enrollment increased 7.6 percent from March 31, 2012 to March 31, 2013," said Jim Woys, Health Net's chief operating officer. "This growth is further affirmation that our commercial product and pricing strategies are driving improved performance."

Enrollment in Health Net's Medicare Advantage (MA) plans was 233,000 members at March 31, 2013, which represents a 3.1 percent increase compared with enrollment of 226,000 members at March 31, 2012.

Medicaid enrollment increased 6.4 percent to approximately 1.1 million members at March 31, 2013 compared with more than 1.0 million members as of March 31, 2012, primarily as a result of additional Seniors and Persons with Disabilities members.

Revenues

Total revenues for the Western Region for the first quarter of 2013 were essentially flat at approximately $2.7 billion compared with the first quarter of 2012.

Net investment income for the Western Region was $29.6 million in the first quarter of 2013 compared with $22.3 million in the first quarter of 2012 and $19.1 million in the fourth quarter of 2012. The quarter-over-quarter and sequential increases were primarily due to higher gain on sales of investments. The company continues to expect full year 2013 net investment income of approximately $80.0 million.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.3 billion in the first quarter of 2013 and decreased by 3.4 percent compared with the first quarter of 2012.

Commercial Premium Yields and Health Care Costs

In the Western Region, commercial premiums per member per month (PMPM) increased by 2.9 percent to approximately $385 in the first quarter of 2013 compared with approximately $375 in the first quarter of 2012.

"The commercial premium PMPM increase was lower than expected due to a more pronounced enrollment shift from large groups to small group and individual than was originally anticipated," said Woys.

Commercial health care costs PMPM in the Western Region decreased 3.3 percent to approximately $331 in the first quarter of 2013 compared with approximately $342 in the first quarter of 2012.

"In addition to the effect of the enrollment mix shift, the decline in the commercial health care cost PMPM is the result of no adverse prior period development and lower utilization in the first quarter of 2013," said Woys. "Therefore, we expect the premium yield-to-health care cost PMPM spread to be 110 basis points greater than our original full year 2013 guidance."

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 86.2 percent in the first quarter of 2013 compared with 89.6 percent in the first quarter of 2012.

The Western Region commercial MCR was 85.9 percent in the first quarter of 2013 compared with 91.4 percent in the first quarter of 2012.

The MA MCR in the Western Region was 91.9 percent in the first quarter of 2013 compared with 87.9 percent in the first quarter of 2012. This increase was primarily the result of timing differences in the accrual for risk adjuster revenues and was consistent with the company's expectations. "This is in line with our full year 2013 guidance which includes the effect of sequestration," said Woys.

The Medicaid MCR in the Western Region was 80.0 percent in the first quarter of 2013 compared with 86.7 percent in the first quarter of 2012.

"The decrease in the Medicaid MCR was primarily the result of revenues from favorable rate adjustments related to prior periods that were recognized in the first quarter of 2013," said Woys. "The effect of this rate adjustment and certain other rate actions was anticipated in our original full year 2013 guidance. A portion of this favorable rate adjustment came earlier than expected. With this in mind, we expect the quarterly Medicaid MCRs for the remainder of 2013 to be approximately 86 percent."

The first quarter of 2013 Medicaid results reflect the impact of Health Net's agreement with California's Department of Health Care Services that went into effect on January 1, 2013.

G&A Expense

G&A expense in the Western Region was approximately $245.2 million in the first quarter of 2013 compared with approximately $230.8 million in the first quarter of 2012. The G&A expense ratio was 9.3 percent in the first quarter of 2013 compared with 8.8 percent in the first quarter of 2012.

"The increase in the G&A expense ratio was primarily due to costs related to the implementation of health care reform, addressing new regulatory requirements and preparation for California's Coordinated Care Initiative that includes the dual-eligible demonstrations," commented Woys.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $134.5 million in the first quarter of 2013 and $181.4 million in the first quarter of 2012.

Government Contracts expenses were approximately $125.5 million in the first quarter of 2013 and $159.3 million in the first quarter of 2012.

"We currently expect Government Contracts' full year 2013 pretax income to be in the $60 million to $65 million range," said Woys.

BALANCE SHEET

Cash and investments as of March 31, 2013 were approximately $2.0 billion compared with approximately $2.2 billion as of December 31, 2012 and $1.8 billion as of March 31, 2012.

Reserves for claims and other settlements as of March 31, 2013 were approximately $1.1 billion compared with $958.1 million at March 31, 2012 and $1.0 billion at December 31, 2012.

Days claims payable (DCP) for the first quarter of 2013 was 43.5 days compared with 37.2 days for the first quarter of 2012 and 40.9 days for the fourth quarter of 2012.

On an adjusted1 basis, DCP for the first quarter of 2013 was 62.1 days compared with 53.0 days for the first quarter of 2012 and 58.3 days for the fourth quarter of 2012.

The company's debt-to-total capital ratio was 24.6 percent as of March 31, 2013 compared with 26.4 percent as of March 31, 2012 and 24.3 percent as of December 31, 2012.

Interest expense was approximately $8.3 million in the first quarter of 2013 compared with $8.6 million in the first quarter of 2012.

CASH FLOWS FROM OPERATIONS

Operating cash flow was negative $28.2 million in the first quarter of 2013, primarily due to a $146.0 million sequential increase in premiums receivable. This increase is related to the timing of certain Medicaid payments and Medicare risk adjuster accruals and payments. The company expects to receive payments related to these items later this year.

"We continue to expect full year 2013 operating cash flow to be at least equal to our revised expectations for net income plus depreciation and amortization," said Joseph Capezza, Health Net's chief financial officer. "As in prior years, quarterly operating cash flow will be influenced by the timing of government payments."

The company noted that cash at the parent was approximately $38.0 million at March 31, 2013.

DIVESTED OPERATIONS AND SERVICES SEGMENT

The company's Divested Operations and Services segment for prior periods 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.

SHARE REPURCHASE

In the first quarter of 2013, Health Net repurchased approximately 2.7 million shares of its common stock for approximately $70 million at an average price of $26.34 per share. At March 31, 2013, approximately $280 million of authorization under the company's existing $400 million share repurchase program remained.

2013 GUIDANCE

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 additional impact from the company's expected participation in the state of California's Coordinated Care Initiative.

        

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%

(prior: ~ +3.6%)

Commercial health care costs PMPM(a)(c)

        

~ 460 basis points < premium yields PMPM

(prior: ~350 basis points < premium yields PMPM)

Selling cost ratio(a)

~2.3% to 2.4%

 

G&A expense ratio(a)

        ~9.0% to 9.4%

Tax rate(b)

        

38.0% to 39.0%

Weighted-average fully diluted shares outstanding

        

~ 80.0 million

Earnings per diluted share

        

$2.20 to $2.30

(prior: $2.00 to $2.10)

 
(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 first quarter 2013 financial results during a conference call on Monday, April 29, 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 30900677. A replay of the conference call will be available through May 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, 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, 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), 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 California's Coordinated Care Initiative 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 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 March 31, 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

 

December 31, 2012  March 31, 2012
March 31,December 31,March 31,Increase/  %  Increase/  %

 

2013  2012  

2012

  (Decrease)  Change  (Decrease)  Change

California

Large Group628696754(68)(9.8)%(126)(16.7)%
Small Group and Individual325  313  302  12   3.8%  23   7.6%

Commercial Risk

9531,0091,056(56)(5.6)%(103)(9.8)%
Medicare Advantage143145139(2)(1.4)%42.9%
Medi-Cal  1,100  1,084  1,034  16   1.5%  66   6.4%

Total California

 

 2,196  2,238  2,229  (42)  (1.9)%  (33)  (1.5)%

 

Arizona

Large Group

 

698282(13)(15.9)%(13)(15.9)%
Small Group and Individual57  59  62  (2)  (3.4)%  (5)  (8.1)%
Commercial Risk126141144(15)(10.6)%(18)(12.5)%
Medicare Advantage  43  43  43  0   0.0%  0   0.0%

Total Arizona

 

 169  184  187  (15)  (8.2)%  (18)  (9.6)%

 

Oregon

Large Group212635(5)(19.2)%(14)(40.0)%
Small Group and Individual45  57  55  (12)  (21.1)%  (10)  (18.2)%
Commercial Risk668390(17)(20.5)%(24)(26.7)%
Medicare Advantage  47  46?
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