Health Net Reports Third Quarter 2012 GAAP Net Income of $18.0 Million, or $0.22 Per Diluted Share

Health Net Reports Third Quarter 2012 GAAP Net Income of $18.0 Million, or $0.22 Per Diluted Share

Western Region Operations and Government Contracts Segments Produce Combined Net Earnings of $0.38 Per Diluted Share

Health Net and California Department of Health Care Services Enter into an Agreement Covering State-Sponsored Health Plans


Agreement Includes 5-Year Extensions of Health Net's Current Medi-Cal Contracts

Health Net Releases the State from Potential Liabilities Related to Rate Dispute Litigation Prior to the 2011/2012 Rate Period

LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYS: HNT) today announced 2012 third quarter GAAP net income of $18.0 million, or $0.22 per diluted share, compared with GAAP net income of $61.8 million, or $0.70 per diluted share, for the third 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 third quarter 2012 GAAP results include approximately $7.2 million in pretax expenses related to the company's general and administrative (G&A) cost reduction efforts and a $4.7 million pretax loss related to the company's divested operations and services.

The company's Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $0.38 per diluted share in the third quarter of 2012 compared with $0.84 per diluted share in the third quarter of 2011.

"We made significant progress on several fronts in the third quarter. We made substantial strides in addressing challenges in our largest commercial accounts, and we believe that our new agreement with California's Department of Health Care Services sets the stage for steadier performance in our state health plans going forward," said Jay Gellert, Health Net's chief executive officer.

"Our financial performance in the third quarter was consistent with revised expectations. There was no adverse prior period development in the quarter, the commercial yield-to-cost spread narrowed compared with prior quarters this year, and our Medicare Advantage business continued to improve compared with last year," Gellert added.

"We're on track to meet our revised 2012 expectations while, at the same time, preparing for what we believe will be a much better 2013," Gellert noted.

STATE SETTLEMENT AGREEMENT

Health Net today also announced that the company and the state of California's Department of Health Care Services (DHCS) have entered into a comprehensive agreement covering Health Net's state-sponsored programs, including Medi-Cal, Seniors and Persons with Disabilities (SPDs), the dual-eligibles pilot programs that currently are expected to begin in the first half of 2013, and any potential future Medicaid expansion under federal health care reform.

"We are pleased that, working together with California's Department of Health Care Services, we have been able to reach this new ground-breaking agreement covering our state health plans," said Gellert.

The agreement has the following key components:

  1. Resolves and releases the state from outstanding Health Net litigation related to Medi-Cal rate disputes for rate years prior to 2011/2012.
  2. Five-year extensions on each of Health Net's four existing Medi-Cal contracts covering seven counties. These contracts are now extended through 2018 to 2022, depending on the individual contract.
  3. Effective January 1, 2013, a new process consistent with DHCS's existing actuarial targets that Health Net believes will help promote greater financial stability and predictability for both parties.

In addition, Health Net and DHCS have agreed to work toward developing an alternative rate dispute resolution process.

A detailed description of the terms of the agreement is included in the company's Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on November 5, 2012.

CONSOLIDATED RESULTS

Health Net's total revenues increased 3.3 percent in the third quarter of 2012 to $2.8 billion from $2.7 billion in the third quarter of 2011.

Health plan services premium revenues increased by 3.7 percent to $2.6 billion in the third quarter of 2012 compared with $2.5 billion in the third quarter of 2011.

Health plan services expenses increased by 6.1 percent to $2.3 billion in the third quarter of 2012 from $2.1 billion in the third quarter of 2011.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at September 30, 2012 was approximately 2.6 million members, a decrease of approximately 1.0 percent compared with enrollment at September 30, 2011. Total enrollment in the company's California health plans decreased approximately 1.5 percent from September 30, 2011 to September 30, 2012.

Western Region commercial enrollment at September 30, 2012 decreased 9.5 percent to approximately 1.3 million members compared with enrollment at September 30, 2011.

"Our commercial enrollment is tracking very closely to our expectations. Tailored network products represented a greater share of our commercial membership at September 30, 2012 compared with September 30, 2011," said Jim Woys, Health Net's chief operating officer.

Enrollment in the company's Medicare Advantage (MA) plans in the Western Region at September 30, 2012 was 231,000 members, an increase of 13.8 percent compared with September 30, 2011.

"We are very pleased that our Medicare growth continues -- an affirmation of our strategy -- and that our products are attractive to seniors in our markets," added Woys.

Medicaid enrollment in California at September 30, 2012 was approximately 1.1 million members, an increase of 81,000 members, or 8.2 percent, from September 30, 2011.

"This year-over-year increase is primarily due to the addition of members from the Seniors and Persons with Disabilities population," commented Woys.

Revenues

Total revenues for the Western Region in the third quarter of 2012 were approximately $2.6 billion compared with approximately $2.5 billion in the third quarter of 2011.

Net investment income for the Western Region was approximately $16.4 million in the third quarter of 2012 compared with approximately $15.2 million in the third quarter of 2011 and $24.7 million in the second quarter of 2012.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.3 billion in the third quarter of 2012 compared with $2.1 billion in the third quarter of 2011.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.7 percent to approximately $377 in the third quarter of 2012 compared with approximately $360 in the third quarter of 2011.

Commercial health care costs PMPM in the Western Region increased by 7.1 percent to approximately $327 in the third quarter of 2012 compared with $305 in the third quarter of 2011.

"While the spread in the third quarter of 2012 was consistent with our expectations, it narrowed considerably compared with the first and second quarter of 2012 as cost trends have stabilized and we recorded no adverse prior period development in the quarter," explained Woys.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 88.5 percent in the third quarter of 2012 compared with 86.4 percent in the third quarter of 2011.

The Western Region commercial MCR was 86.7 percent in the third quarter of 2012 compared with 84.8 percent in the third quarter of 2011 and 88.7 percent in the second quarter of 2012.

The MA MCR in the Western Region was 90.1 percent in the third quarter of 2012 compared with 90.7 percent in the third quarter of 2011.

"Our improving MA MCR is consistent with our enrollment growth this year and moderate cost trends," said Woys.

G&A and Selling Expenses

G&A expense in the Western Region was approximately $218.4 million in the third quarter of 2012 compared with $211.4 million in the third quarter of 2011. The G&A expense ratio of 8.5 percent in the third quarter of 2012 was flat compared with the third quarter of 2011 and increased 20 basis points from 8.3 percent in the second quarter of 2012.

Selling expense in the Western Region was approximately $61.1 million in the third quarter of 2012 compared with $57.9 million in the third quarter of 2011.

"We spent approximately $4 million in incremental G&A expenses during the third quarter of 2012 to prepare for the implementation of the dual-eligibles pilot programs currently scheduled for the middle of 2013," commented Woys. "We expect to see this amount increase in the fourth quarter of 2012."

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the third quarter of 2012 were $169.8 million compared with $175.8 million in the third quarter of 2011.

Government Contracts expenses in the third quarter of 2012 were $148.7 million compared with $127.7 million in the third quarter of 2011.

BALANCE SHEET

Cash and investments were approximately $2.0 billion as of September 30, 2012 and September 30, 2011.

Reserves for claims and other settlements as of September 30, 2012 were $1.0 billion compared with $873.0 million as of September 30, 2011 and $1.0 billion as of June 30, 2012.

Days claims payable (DCP) for the third quarter of 2012 was 41.6 days compared with 37.4 days in the third quarter of 2011 and 39.0 days in the second quarter of 2012.

On an adjusted1 basis, DCP for the third quarter of 2012 was 57.7 days compared with 51.7 days in the third quarter of 2011 and 54.3 days in the second quarter of 2012.

"The year-over-year and sequential increase in DCP is primarily the result of higher reserves," said Joseph Capezza, Health Net's chief financial officer.

The company's debt-to-total capital ratio was 24.4 percent as of September 30, 2012 compared with 27.4 percent as of September 30, 2011 and 24.1 percent as of June 30, 2012.

Interest expense was $8.0 million in the third quarter of 2012 compared with approximately $7.8 million in the third quarter of 2011.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $124.8 million in the third quarter of 2012, primarily as a result of receiving only two monthly Medicare payments from the Centers for Medicare & Medicaid Services (CMS) during the quarter.

"We continue to expect full-year 2012 operating cash flow to be approximately $10 million. 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 Capezza.

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 REPURCHASES

In the third quarter of 2012, Health Net repurchased 1.5 million shares of its common stock for $36.1 million at an average price of $23.79 per share. At September 30, 2012, approximately $350.0 million of authorization under the company's existing $400 million share repurchase program remained.

2012 GUIDANCE

Below is a table with specific 2012 guidance metrics.

Metric

                   

2012 Guidance

                   

Year-end membership (a)

Commercial

-9% to -10%

Medicaid

+7% to +8%

Medicare Advantage

+11% to +13%
 

Total Western Region

                    -1% to -2%

Consolidated revenues(b)(c)

                   

~$11.0 billion to $11.5 billion

Commercial premium yields PMPM(a)

                   

~ +4.8% to +5.3%

Commercial health care costs PMPM(a)

                   

350 to 400 bps > premium yields PMPM

Selling cost ratio(a)

~2.3% to 2.4%

G&A expense ratio(a)(c)

                    ~8.5% to 8.7%

Tax rate(b)

                   

30.0% to 31.0%

Weighted-average fully diluted shares outstanding(d)

                   

~83.0 million to 84.0 million

GAAP EPS(c)(d)

$1.45 to $1.55

Combined Western Region and Government Contracts EPS(c)(d)

                    $1.00 to $1.10
 
(a)     For the company's Western Region Operations segment
(b) For the combined Western Region Operations and Government Contracts segments
(c) These metrics include the impact of the sale of the company's Medicare PDP business that closed on April 1, 2012.
(d) The company's guidance does not include the impact of share repurchases other than those to counter dilution.
 

CONFERENCE CALL

Health Net will discuss the company's third quarter 2012 results and state settlement agreement during its previously announced conference call on Monday, November 5, 2012, beginning at approximately 11:30 a.m. Eastern time. The live 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 35473774. A replay of the conference call will be available through November 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 will be presumed to have read Health Net's Annual Report on Form 10-K for the year ended December 31, 2011 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2012 and June 30, 2012, and other reports filed by Health Net from time to time with the SEC.

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 5.4 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. Health Net's behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 4.9 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 Health Net'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 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 including 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 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 September 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.
Enrollment Data - By State
(In thousands)
    Change from
June 30, 2012     September 30, 2011
September 30, June 30, September 30, Increase/ % Increase/ %
2012     2012     2011     (Decrease)     Change     (Decrease)     Change
California
Large Group 714 745 837 (31 ) (4.2 )% (123 ) (14.7 )%
Small Group and Individual 307     303     318     4       1.3 %     (11 )     (3.5 )%
Commercial Risk 1,021 1,048 1,155 (27 ) (2.6 )% (134 ) (11.6 )%
Medicare Advantage 143 141 124 2 1.4 % 19 15.3 %
Medi-Cal       1,069     1,060     988     9       0.8 %     81       8.2 %
Total California       2,233     2,249     2,267     (16 )     (0.7 )%     (34 )     (1.5 )%
 
Arizona
Large Group 84 84 76 0 0.0 % 8 10.5 %
Small Group and Individual 59     61     61     (2 )     (3.3 )%     (2 )     (3.3 )%
Commercial Risk 143 145 137 (2 ) (1.4 )% 6 4.4 %
Medicare Advantage       43     43     40     0       0.0 %     3       7.5 %
Total Arizona       186     188     177     (2 )     (1.1 )%     9       5.1 %
 
Oregon

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