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
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
The 2012 second quarter GAAP results include:
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
Two key factors impacting the performance in the second quarter of 2012
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
“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
“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.”
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,
“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.
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
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
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 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.
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.
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.
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.
Total Western Region
~$11.0 billion to $11.5 billion
(previously ~200 to 220 basis points > premium yields PMPM)
Selling cost ratio(a)
G&A expense ratio(a)(c)
diluted shares outstanding(d)
$1.45 to $1.55 (previously $2.85 to $3.00)
$1.00 to $1.10 (previously $2.35 to $2.50)
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
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
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
For more information on Health Net, Inc., please visit the company’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, 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.
Health Net, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except ratio data)
Incurred but not reported (IBNR) health care costs receivable
under TRICARE North contract
Condensed Consolidated Statements of Cash Flows
(Amount in thousands)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Includes litigation reserve true-ups related to previous accruals
for class action lawsuits and related legal expenses.
Reserve for Claims and Other Settlements - GAAP
Health Plan Services Cost - GAAP
Health Net, Inc.Investor ContactAngie
Source: Health Net, Inc.