GAAP Results Include Impact of $119.4 Million Net Gain from the Sale of Discontinued Operations

Company Reduces Full-Year 2012 Guidance

Western Region Operations and Government Contracts Segments Produce Combined Net Earnings of $0.19 Per Diluted Share

LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYSE: HNT) today announced 2012 second quarter GAAP net income of $124.6 million, or $1.48 per diluted share, compared with $58.3 million, or $0.63 per diluted share, for the second 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 as discontinued operations.

The 2012 second quarter GAAP results include:

1. a $119.4 million net gain from the sale of discontinued operations, representing the company’s Medicare PDP business that was sold to an affiliate of CVS Caremark Corporation on April 1, 2012;
2. a $6.5 million pretax loss related to the company’s divested operations and services; and
3. $10.8 million in expenses related to the company’s general and administrative (G&A) cost reduction efforts.

For the second quarter of 2012, the company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $15.9 million, or $0.19 per diluted share, compared with $71.0 million, or $0.77 per diluted share, for the second quarter of 2011.

Two key factors impacting the performance in the second quarter of 2012 were:

1. higher than expected commercial health care costs primarily arising from a select number of large group accounts with membership in full-network products; and
2. higher than expected Medicaid health care costs primarily arising from the senior and persons with disabilities (SPDs) membership.

The $61.0 million in adverse prior period development in the second quarter of 2012 includes $48.9 million of adverse prior development related to the first quarter of 2012. The majority of this adverse prior period development is attributable to the commercial business.

“We believe that we have identified and are on the path to resolving the issues in the commercial and Medicaid businesses that impacted our second quarter performance,” said Jay Gellert, Health Net’s chief executive officer. “We identified specific commercial large group accounts that contributed to increased health care costs early enough this year. We are adjusting rates, modifying network configurations, and taking other actions to achieve substantial commercial improvement in 2013.

“We currently are actively engaged in what we believe are productive discussions with the state of California’s Department of Health Care Services (DHCS) on a wide range of issues, including rates for Medi-Cal and the SPDs,” Gellert continued. “Based on our experience to date, current SPD rates are inadequate. We are hopeful that these discussions with DHCS will result in a process intended to ensure adequate rates going forward.

“We are revising our full-year 2012 earnings guidance for the combined Western Region and Government Contracts segments to a range of $1.00 to $1.10 per diluted share due to the commercial large group and Medicaid issues,” Gellert added. “This guidance also reflects $20 million to $25 million in incremental G&A costs associated with the implementation of the dual-eligible demonstration pilots in California.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 7.1 percent in the second quarter of 2012 to $2.8 billion from $2.7 billion in the second quarter of 2011.

Health plan services premium revenues increased by approximately 7.2 percent to $2.6 billion in the second quarter of 2012 compared with $2.4 billion in the second quarter of 2011.

Health plan services expenses increased 11.1 percent to $2.4 billion in the second quarter of 2012 compared with $2.1 billion in the second quarter of 2011.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2012 was approximately 2.6 million members, or essentially flat compared with enrollment at June 30, 2011. Total enrollment in the company’s California health plans at June 30, 2012 was also flat compared with enrollment at June 30, 2011.

Western Region commercial enrollment at June 30, 2012 declined 7.4 percent to approximately 1.3 million members from enrollment at June 30, 2011.

“Overall commercial enrollment declined primarily due to competitive markets,” said Jim Woys, Health Net’s chief operating officer. “However, we are very pleased that membership in our tailored network products grew by 6.5 percent to more than 450,000 members since June 30, 2011. We believe these products will continue to perform well and membership will continue to grow as they provide comprehensive benefits at affordable prices, positioning them well for the exchanges.”

As of June 30, 2012, tailored network products accounted for 35.2 percent of the company’s Western Region commercial enrollment compared with 30.5 percent at June 30, 2011.

Medicaid enrollment in California at June 30, 2012 was approximately 1.1 million members, an increase of 97,000 members, or 10.1 percent, from June 30, 2011.

Enrollment in the company’s Medicare Advantage (MA) plans in the Western Region at June 30, 2012 was 228,000 members, an increase of 11.2 percent compared with June 30, 2011.

Revenues

Total revenues in the Western Region in the second quarter of 2012 were approximately $2.7 billion compared with $2.5 billion in the second quarter of 2011.

Net investment income in the Western Region was $24.7 million in the second quarter of 2012 compared with $25.1 million in the second quarter of 2011 and $22.3 million in the first quarter of 2012.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.4 billion in the second quarter of 2012 compared with approximately $2.1 billion in the second quarter of 2011.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.6 percent to $373 in the second quarter of 2012 compared with $357 in the second quarter of 2011.

Commercial health care costs PMPM in the Western Region increased by 8.2 percent to approximately $331 in the second quarter of 2012 compared with $306 in the second quarter of 2011.

“The 360 basis point negative spread between commercial premium yields and health care costs PMPM was primarily due to the adverse prior period development in the second quarter and margin pressure due to emerging adverse risk selection in the company’s largest commercial accounts,” Woys said. “We are revising our full-year 2012 guidance on the commercial spread to negative 350 to 400 basis points due to the adverse prior period development.”

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 90.1 percent in the second quarter of 2012 compared with 86.9 percent in the second quarter of 2011. The Western Region commercial MCR was 88.7 percent in the second quarter of 2012 compared with 85.7 percent in the second quarter of 2011.

The MA MCR in the Western Region was 92.0 percent in the second quarter of 2012 compared with 90.9 percent in the second quarter of 2011 primarily due to $14.4 million of adverse prior period development in the second quarter of 2012 related to the first quarter of 2012.

“The MA MCR for the first half of 2012 was 89.9 percent compared with 90.0 percent in the first half of 2011. These results are consistent with our goal to reduce the MA MCR in 2012 compared with 2011,” said Woys.

The Medicaid MCR was 91.3 percent in the second quarter of 2012 compared with 85.2 percent in the second quarter of 2011. The increase was due to higher claims experience in the company’s SPD membership.

G&A Expenses

G&A expense in the Western Region was approximately $218.7 million in the second quarter of 2012 compared with $197.4 million in the second quarter of 2011. The G&A expense ratio was 8.3 percent in the second quarter of 2012 compared with 8.1 percent in the second quarter of 2011.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $176.2 million in the second quarter of 2012 compared with $171.0 million in the second quarter of 2011.

Government Contracts expenses were $152.7 million in the second quarter of 2012 compared with $130.8 million in the second quarter of 2011.

Pretax income from the Government Contracts segment declined by $16.7 million in the second quarter of 2012 compared with the second quarter of 2011. The decline in pretax income was primarily due to legacy benefits from the company’s previous TRICARE contract that positively impacted pretax income in the second quarter of 2011.

BALANCE SHEET

Cash and investments as of June 30, 2012 were $2.1 billion compared with $1.7 billion as of June 30, 2011.

Reserves for claims and other settlements as of June 30, 2012 were $1.0 billion compared with $900.7 million as of June 30, 2011 and $958.1 million as of March 31, 2012.

Days claims payable (DCP) for the second quarter of 2012 was 39.0 days compared with 38.6 days in the second quarter of 2011 and 37.2 days in the first quarter of 2012.

On an adjusted¹ basis, DCP in the second quarter of 2012 was 54.3 days compared with 52.0 days in the second quarter of 2011 and 53.0 days in the first quarter of 2012.

The company’s debt-to-total capital ratio was 24.1 percent as of June 30, 2012 compared with 26.4 percent as of March 31, 2012 and 28.2 percent as of June 30, 2011.

CASH FLOW FROM OPERATIONS

Operating cash flow was $119.8 million in the second quarter of 2012. The company received an extra monthly Medicaid payment of approximately $102.0 million from the state of California during the second quarter.

“We expect operating cash flow of approximately $10 million for the full-year 2012. This reflects the loss from discontinued operations. However, the cash benefit from the gain on sale associated with the sold Medicare PDP business is reflected in Cash Flow from Investing Activities,” said Joseph Capezza, Health Net’s chief financial officer.

SHARE REPURCHASE

From April 1 through August 1, 2012, Health Net repurchased approximately 1.8 million shares of its common stock for $44.6 million at an average price of $24.77 per share. At August 1, 2012, approximately $355.4 million of authorization under the company’s existing $400 million share repurchase program remained.

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 administer run-out claims and provide certain administrative services for the Northeast business pursuant to claims servicing agreements in place with UnitedHealthcare and its affiliates.

2012 GUIDANCE

Health Net is reducing its 2012 full-year guidance for GAAP earnings per diluted share to a range of $1.45 to $1.55, or $1.00 to $1.10 for the combined Western Region and Government Contracts segments.

Following is a table with specific 2012 guidance metrics.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s second quarter 2012 results during a conference call on Friday, August 3, 2012, 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:

The access code for the live conference call and replay is 96830520. A replay of the conference call will be available through August 10, 2012. 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, 2011, Form 10-Q for the quarter ended March 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, through its subsidiaries, provides and administers health benefits to approximately 5.5 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. Health Net’s behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 4.8 million individuals, including Health Net’s own health plan members. Health Net’s subsidiaries also offer managed health care products related to prescription drugs, and offer 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, 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, 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; any liabilities incurred in connection with our divested operations; 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 risks discussed in Health Net’s other 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 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 as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Form 10-Q for the period ended June 30, 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.