HNT Health Net Inc.

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 8-K

 

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported):

August 6, 2014

 

 

Health Net, Inc.

(Exact Name of Registrant as Specified in Charter)

 

 

 

Delaware		1-12718		95-4288333
(State or Other Jurisdiction of Incorporation)		(Commission File Number)		(IRS Employer Identification No.)
21650 Oxnard Street, Woodland Hills, California				91367
(Address of Principal Executive Offices)				(Zip Code)

Registrant’s telephone number, including area code: (818) 676-6000

Not Applicable

Former Name or Former Address, if Changed Since Last Report

 

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

 

¨	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

 

¨	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

 

¨	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

 

¨	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

 

 

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Item 2.02

Results of Operations and Financial Condition.

On August 6, 2014, Health Net, Inc. (“we”, “us” or “our”) issued a press release announcing our financial results for the quarter ended June 30, 2014. The press release contains the non-GAAP financial measure “adjusted days claims payable (DCP).”

Set forth below is a reconciliation of adjusted DCP to the comparable GAAP financial measure, DCP. DCP is calculated by dividing the amount of reserve for claims and other settlements (claims reserve) by health plan services cost (health plan costs) during the quarter and multiplying that amount by the number of days in the quarter. In the press release, management presents an adjusted DCP metric which subtracts capitation, provider and other claims settlements and Medicare Advantage-Prescription Drug (MAPD) payables/costs from the claims reserve and health plan costs.

Management believes that adjusted DCP provides useful information to investors because the adjusted DCP calculation excludes from both claims reserve and health plan costs amounts related to health care costs for which no or minimal reserves are maintained. Therefore, management believes that adjusted DCP may present a more accurate reflection of DCP than does GAAP DCP, which includes such amounts. This non-GAAP financial information should be considered in addition to, not as a substitute for, financial information prepared in accordance with GAAP.

You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating the adjusted amounts, you should be aware that we have incurred expenses that are the same as or similar to some of the adjustments in the current presentation and we may incur them again in the future.

Our presentation of the adjusted amounts should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items.

 

		Q2 2014				Q1 2014				Q2 2013
Reconciliation of Days Claims Payable:		(Dollars in Millions)
(1) Reserve for Claims and Other Settlements—GAAP		$	1,488.3			$	1,152.0			$	1,013.1
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables			(351.7	)			(169.4	)			(143.1	)
(2) Reserve for Claims and Other Settlements—Adjusted		$	1,136.6			$	982.6			$	870.0
(3) Health Plan Services Cost—GAAP		$	2,763.2			$	2,402.3			$	2,191.9
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs			(1,156.0	)			(999.9	)			(836.9	)
(4) Health Plan Services Cost—Adjusted		$	1,607.2			$	1,402.4			$	1,355.0
(5) Number of Days in Period			91				90				91
= (1) / (3) * (5) Days Claims Payable—GAAP Basis (using end of period reserve amount)			49.0				43.2				42.1
= (2) / (4) * (5) Days Claims Payable—Adjusted Basis (using end of period reserve amount)			64.4				63.1				58.4

The press release is attached hereto as Exhibit 99.1 and hereby incorporated in this Item 2.02 by reference. The information in this Item 2.02 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by

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reference in any filing by Health Net, Inc. under the Securities Act of 1933 or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

Item 9.01

Financial Statements and Exhibits.

 

(d)

Exhibits

 

99.1		Press Release dated August 6, 2014

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Exhibit Index

 

Exhibit No.		Document Description
99.1		Press Release dated August 6, 2014

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

						Health Net, Inc.
August 6, 2014						By:		/s/ Joseph C. Capezza
						Name:		Joseph C. Capezza
						Title:		Executive Vice President, Chief Financial Officer and Treasurer

Exhibit 99.1

 

 

Investor Contact:		Media Contact:
David Olson		Brad Kieffer
The Abernathy MacGregor Group		(818) 676-6833
(818) 917-1469		brad.kieffer@healthnet.com
dwo@abmac.com

HEALTH NET REPORTS SECOND QUARTER 2014 GAAP NET INCOME

OF $120.9 MILLION, OR $1.49 PER DILUTED SHARE

WESTERN REGION OPERATIONS AND GOVERNMENT CONTRACTS SEGMENTS PRODUCE

COMBINED NET INCOME OF $0.62 PER DILUTED SHARE IN SECOND QUARTER 2014

YEAR-OVER-YEAR, HEALTH PLAN SERVICES PREMIUM REVENUES GREW 26.5 PERCENT

HEALTH PLAN ENROLLMENT CLIMBS 17.4 PERCENT YEAR-OVER-YEAR,

DRIVEN BY CONTINUED COMMERCIAL GROWTH FROM EXCHANGES

AND MEDICAID GROWTH FROM EXPANSION

COMPANY ANNOUNCES LETTER OF INTENT FOR COMPREHENSIVE SERVICES AGREEMENT

IN COLLABORATION WITH COGNIZANT TECHNOLOGY SOLUTIONS:

HEALTH NET EXPECTS $150 TO $200 MILLION IN ANNUAL G&A

AND DEPRECIATION EXPENSE SAVINGS BY 2017

LOS ANGELES, August 6, 2014 – Health Net, Inc. (NYSE: HNT) today announced 2014 second quarter GAAP net income of $120.9 million, or $1.49 per diluted share, compared with GAAP net income of $33.5 million, or $0.42 per diluted share, for the second quarter of 2013.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $50.3 million, or $0.62 per diluted share, in the second quarter of 2014 compared with $41.4 million, or $0.52 per diluted share, in the second quarter of 2013.

The second quarter 2014 results include approximately $3.3 million in pretax expenses, primarily related to severance costs, and a $72.6 million income tax benefit resulting from a loss on the stock of our subsidiary, Health Net of the Northeast.

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Highlights from the second quarter of 2014 include:

 

1.

Health Net’s total revenues climbed 24.9 percent in the second quarter of 2014 compared with the second quarter of 2013, and health plan services premiums revenues grew 26.5 percent over the same period;

 

2.

The company achieved 17.4 percent enrollment growth in its Western Region health plans in the second quarter of 2014 compared with the second quarter of 2013;

 

3.

Individual enrollment increased by 260,000 members, or 226.1 percent, in the second quarter of 2014 compared with the second quarter of 2013 and increased by 168,000 members, or 81.2 percent, compared with the first quarter of 2014. This sequential growth was primarily driven by the enrollment of new individual members through the Affordable Care Act (ACA) exchanges;

 

4.

Medicaid enrollment increased by 286,000 members, or 25.6 percent, in the second quarter of 2014 compared with the second quarter of 2013 and by more than 8 percent sequentially. This was primarily the result of new members added in Arizona and California from the expansion of Medicaid eligibility under the ACA; and

 

5.

The company’s Western Region commercial Medical Care Ratio (MCR) improved by 260 basis points year-over-year, as health care cost trends remained moderate, the product mix improved and the company’s premiums reflect the new Health Insurer Fee (HIF).

“We are very encouraged by our results so far in 2014. Our focused and deliberate strategic approaches to the new opportunities in the exchanges and Medicaid expansion are driving substantial enrollment and revenue growth and higher income,” said Jay Gellert, Health Net’s chief executive officer.

“We expect further growth in the second half of 2014 from the dual eligible demonstrations in Los Angeles and San Diego counties and continued enrollment growth from Medicaid expansion,” he added.

The company also announced it has signed a Letter of Intent with Cognizant Technology Solutions (Cognizant), a leading provider of information technology, consulting and business process services, as part of its commitment to address its scale issue. The company expects to execute a definitive services agreement with Cognizant before the end of the third quarter of 2014, which will be subject to required regulatory approval. The services agreement is currently expected to generate approximately $150 to $200 million in annual General and Administrative (G&A) and depreciation expense savings by 2017.

“Our decision to move forward with the services agreement was the result of many months of careful consideration. We believe that our expanded relationship with Cognizant will enhance our capabilities, enable greater innovation and ensure that we will maintain the high service levels our members and providers have come to expect from Health Net,” noted Gellert. “We will begin preparing for the transition immediately upon signing. We will then submit our plan for the required regulatory approval. We expect to receive approval in the first half of 2015.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 24.9 percent in the second quarter of 2014 to $3.4 billion from $2.7 billion in the second quarter of 2013.

Health plan services premium revenues of approximately $3.3 billion in the second quarter of 2014 increased by 26.5 percent compared with the second quarter of 2013.

Health plan services expenses of approximately $2.8 billion in the second quarter of 2014 increased by 26.1 percent compared with the second quarter of 2013.

 

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WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2014 was approximately 2.9 million members, an increase of 17.4 percent from enrollment at June 30, 2013.

Total enrollment in the company’s California health plans at June 30, 2014 was approximately 2.5 million members, an increase of 14.3 percent from enrollment at June 30, 2013.

Western Region commercial enrollment at June 30, 2014 was approximately 1.3 million members, an increase of 10.4 percent compared with enrollment at June 30, 2013.

Membership in tailored network products represented 52.5 percent of the company’s Western Region commercial membership at June 30, 2014 compared with 37.3 percent at June 30, 2013.

“Our historical success with tailored network products provided the basis for our product strategy in the exchanges where most of our enrollment is in tailored network products,” said Jim Woys, Health Net’s chief operating officer. “As a result of the exchange growth, we expect the percentage of commercial enrollment in tailored network products to remain at greater than 50 percent through 2014,” explained Woys.

Enrollment in the company’s Medicare Advantage (MA) plans was 262,000 members at June 30, 2014, which represents an 11.0 percent increase compared with enrollment of 236,000 members at June 30, 2013.

Medicaid enrollment increased 25.6 percent to 1.4 million members at June 30, 2014 compared with approximately 1.1 million members as of June 30, 2013, primarily due to Medicaid expansion under the ACA.

Dual eligibles enrollment was 2,000 members at June 30, 2014.

“We expect duals enrollment to accelerate in the second half of 2014, primarily due to the start of passive enrollment in Los Angeles County on July 1, 2014,” Woys added.

Revenues

Total revenues for the Western Region for the second quarter of 2014 were approximately $3.3 billion compared with approximately $2.6 billion in the second quarter of 2013.

Net investment income in the Western Region was $12.0 million in the second quarter of 2014 compared with $17.1 million in the second quarter of 2013 and $11.1 million in the first quarter of 2014.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.8 billion in the second quarter of 2014 compared with approximately $2.2 billion in the second quarter of 2013.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) decreased by 0.4 percent to approximately $379 in the second quarter of 2014 compared with approximately $380 in the second quarter of 2013.

Commercial health care costs PMPM in the Western Region decreased by 3.4 percent to approximately $312 in the second quarter of 2014 compared with approximately $323 in the second quarter of 2013.

 

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“Health care cost trends remain moderate by historical standards for physician, inpatient and outpatient services,” said Woys. “We also benefit from the improving mix of our commercial business as large group enrollment has declined and individual enrollment, largely in our tailored network products, has increased significantly due to our success with the exchanges.”

Medical Care Ratios

The health plan services MCR in the Western Region was 84.7 percent in the second quarter of 2014 compared with 85.0 percent in the second quarter of 2013.

The Western Region commercial MCR was 82.3 percent in the second quarter of 2014 compared with 84.9 percent in the second quarter of 2013 due to continued moderation in cost trends, an improved product mix and premium increases to reflect the new HIF.

The MA MCR in the Western Region was 90.9 percent in the second quarter of 2014 compared with 89.9 percent in the second quarter of 2013.

The Medicaid MCR was 83.6 percent in the second quarter of 2014 compared with 79.5 percent in the second quarter of 2013. Retroactive reinstatement of premium taxes in the second quarter of 2013 benefited the Medicaid MCR in the second quarter of 2013 by 400 basis points.

G&A Expenses

G&A expenses in the Western Region were $342.0 million in the second quarter of 2014 compared with $284.1 million in the second quarter of 2013 and $357.9 million in the first quarter of 2014. The G&A expense ratio was 10.5 percent in the second quarter of 2014 compared with 11.0 percent in the second quarter of 2013 and 12.4 percent in the first quarter of 2014.

“The administrative expense ratio, which excludes premium taxes and ACA-related fees, also declined sequentially and year-over-year in the second quarter of 2014,” said Woys. “We are very focused on continued improvement in our administrative efficiency while preparing for the transition with Cognizant.”

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $154.1 million in the second quarter of 2014 compared with $139.9 million in the second quarter of 2013.

Government Contracts expenses were $132.6 million in the second quarter of 2014 compared with $121.8 million in the second quarter of 2013.

BALANCE SHEET

Cash and investments as of June 30, 2014 were $2.3 billion compared with $1.9 billion as of June 30, 2013.

Reserves for claims and other settlements were $1.5 billion as of June 30, 2014 compared with $1.0 billion as of June 30, 2013 and $1.2 billion as of March 31, 2014.

Days claims payable (DCP) for the second quarter of 2014 was 49.0 days compared with 42.1 days in the second quarter of 2013 and 43.2 days in the first quarter of 2014.

 

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On an adjusted¹ basis, DCP for the second quarter of 2014 was 64.4 days compared with 58.4 days in the second quarter of 2013 and 63.1 days in the first quarter of 2014.

The company’s debt-to-total capital ratio was 21.5 percent as of June 30, 2014 compared with 22.9 percent as of March 31, 2014 and 25.6 percent as of June 30, 2013.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $13.8 million in the second quarter of 2014 because the company did not receive approximately $300 million of expected Medicaid payments in the second quarter.

“We received approximately $262 million in June Medi-Cal payments on July 28, 2014,” said Joseph Capezza, Health Net’s chief financial officer. “We now have received all June payments.”

The company noted that cash at the parent was approximately $200.4 million at June 30, 2014.

STOCK REPURCHASE UPDATE

Health Net did not repurchase any shares of its common stock in the second quarter of 2014 as it was evaluating its scale issues. At June 30, 2014, approximately $280 million of authorization under the company’s existing $400 million stock repurchase program remained.

“We intend to resume repurchases in the third quarter of 2014 through privately negotiated transactions, accelerated share repurchase programs, open market transactions, or by any combination of such methods,” Capezza explained.

“We are increasing our guidance for weighted-average fully diluted shares outstanding in 2014 to approximately 80 million shares from our prior guidance of 77 million shares,” he added.

2014 GUIDANCE

 

The company is maintaining GAAP earnings per diluted share of at least $3.00 for the full year 2014.

The table included in this release provides specific 2014 guidance metrics, including updates to expectations for Medicaid and total health plan membership, state health plans revenues, the Medicaid MCR, tax rates and weighted-average fully diluted shares outstanding.

“We are maintaining our diluted EPS guidance for the combined Western Region and Government Contracts segments of at least $2.22 despite the higher share count. In effect, we are increasing our pretax income guidance for the combined segments by approximately $12 million for the full year,” Capezza noted.

  

 

1

For a reconciliation of adjusted days claims payable to the comparable GAAP financial measure, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Days Claims Payable” in the company’s Form 10-Q for the quarter ended June 30, 2014, and Item 2.02 in the company’s Form 8-K filed with the Securities and Exchange Commission on August 6, 2014.

 

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CONFERENCE CALL

As previously announced, Health Net will discuss the company’s second quarter 2014 financial results during a conference call on Wednesday, August 6, 2014, 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:

 

(877) 407-4019 (Domestic)		(877) 660-6853 (Replay – Domestic)
(201) 689-8337 (International)		(201) 612-7415 (Replay – International)

An access code is not required for the live conference call on August 6, 2014. The access code for the replay is 13585376. The replay of the conference call will be available through August 11, 2014. 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, 2013, Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, 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 5.8 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 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

The company 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.

 

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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 taxation or regulation of health benefits and managed care operations, including but not limited to the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the “ACA”) and related fees, assessments and taxes; the company’s ability to successfully participate in California’s Coordinated Care Initiative, which is subject to a number of risks inherent in untested health care initiatives and requires the company to adequately predict the costs of providing benefits to individuals that are generally among the most chronically ill within each of Medicare and Medi-Cal and implement delivery systems for benefits with which the company has limited operating experience; the company’s ability to successfully participate in the federal and state health insurance exchanges under the ACA, which have experienced technical challenges in implementation and which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of our premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs, including but not limited to costs associated with the introduction of new treatments or therapies; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance which could be significantly impacted if we are unable to reach a final agreement with Cognizant or do not receive applicable regulatory approval of any final services agreement; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; the company’s ability to successfully participate in Arizona’s Medicaid program; trends in medical care ratios; membership declines or negative changes in our health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; the timing of collections on amounts receivable from state and federal governments and agencies, including collections of amounts owed under the T-3 contract; 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; changes in economic or market conditions; failure to effectively oversee our third-party vendors; noncompliance by the company or the company’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; impairment of the company’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 the company’s most recent Annual Report on Form 10-K and subsequent Quarterly Report on Form 10-Q filed with the SEC and the other risks discussed in the company’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, the company undertakes no obligation to address or publicly update any 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 June 30, 2014.

Eight pages of tables follow.

 

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Health Net, Inc.

2014 GAAP Guidance⁽¹⁾

 

MEMBERSHIP		Current (updated  8/6/14)				Previous (as of  5/7/14)
		Enrollment at 12/31/2014				Enrollment at 12/31/2014
Commercial
Large Group			560,000				560,000
Small Group			280,000				280,000
Individual			380,000				380,000
Total Commercial			1,220,000				1,220,000
Medicare Advantage			260,000				260,000
Medicaid			1,585,000				1,535,000
Dual Eligibles			38,000				38,000
Total Health Plan Membership			3,103,000				3,053,000
Premium Revenues		FY2014				FY2014
Commercial		$	5.6 billion			$	5.6 billion
Medicare Advantage		$	3.0 billion			$	3.0 billion
State Health Plans		$	4.5 billion			$	4.4 billion
Dual Eligibles		$	342 million			$	342 million
Total Health Plans		$	13.4 billion			$	13.3 billion
Total Consolidated Revenues		$	14.0 billion			$	14.0 billion
Medical Care Ratios (MCR)		FY2014				FY2014
Commercial			83.0%				83.0%
Medicare Advantage			90.9%				90.9%
Medicaid			83.6%				83.9%
Dual Eligibles			86.5%				86.5%
G&A Expense Ratio			10.8%				10.8%
Tax Rate(2)			31.1%				34.6%
Western Region and Government Contracts Tax Rate(3)			51.5%				52.2%
Weighted-average fully diluted shares outstanding			80 million				77 million
GAAP Earnings per Diluted Share (EPS)(2)			At least $3.00				At least $3.00
Western Region and Government Contracts EPS(3)			At least $2.22				At least $2.22

 

(1)	All guidance metrics are approximations

 

(2)	Includes a $72.6 million tax benefit

 

(3)	Excludes the $72.6 million tax benefit

 

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Health Net, Inc.

Enrollment Data - By State

(In thousands)

 

														Change from
														March 31, 2014								June 30, 2013
		June 30,				March 31,				June 30,				Increase/				%				Increase/				%
		2014				2014				2013				(Decrease)				Change				(Decrease)				Change
California
Large Group			492				499				608				(7	)			(1.4	)%			(116	)			(19.1	)%
Small Group			240				239				241				1				0.4	%			(1	)			(0.4	)%
Individual			272				158				98				114				72.2	%			174				177.6	%
Commercial Risk			1,004				896				947				108				12.1	%			57				6.0	%
Medicare Advantage			162				156				146				6				3.8	%			16				11.0	%
Medi-Cal			1,359				1,279				1,118				80				6.3	%			241				21.6	%
Dual Eligibles			2												2				0.0	%			2				0.0	%
Total California			2,527				2,331				2,211				196				8.4	%			316				14.3	%
Arizona
Large Group			48				50				64				(2	)			(4.0	)%			(16	)			(25.0	)%
Small Group			43				40				42				3				7.5	%			1				2.4	%
Individual			99				47				14				52				110.6	%			85				607.1	%
Commercial Risk			190				137				120				53				38.7	%			70				58.3	%
Medicare Advantage			46				46				43				0				0.0	%			3				7.0	%
Medicaid			45				18								27				150.0	%			45				0.0	%
Total Arizona			281				201				163				80				39.8	%			118				72.4	%
Northwest
Large Group			28				29				23				(1	)			(3.4	)%			5				21.7	%
Small Group			25				27				40				(2	)			(7.4	)%			(15	)			(37.5	)%
Individual			4				2				3				2				100.0	%			1				33.3	%
Commercial Risk			57				58				66				(1	)			(1.7	)%			(9	)			(13.6	)%
Medicare Advantage			54				53				47				1				1.9	%			7				14.9	%
Total Northwest			111				111				113				0				0.0	%			(2	)			(1.8	)%
Total Health Plan Enrollment
Large Group			568				578				695				(10	)			(1.7	)%			(127	)			(18.3	)%
Small Group			308				306				323				2				0.7	%			(15	)			(4.6	)%
Individual			375				207				115				168				81.2	%			260				226.1	%
Commercial Risk			1,251				1,091				1,133				160				14.7	%			118				10.4	%
Medicare Advantage			262				255				236				7				2.7	%			26				11.0	%
Medi-Cal/Medicaid			1,404				1,297				1,118				107				8.2	%			286				25.6	%
Dual Eligibles			2				0				0				2				0.0	%			2				0.0	%
Western Region Operations			2,919				2,643				2,487				276				10.4	%			432				17.4	%
TRICARE - North Contract Eligibles			2,849				2,851				2,865				(2	)			(0.1	)%			(16	)			(0.6	)%

 

9

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Health Net, Inc.

Enrollment Data - Line of Business

(In thousands)

 

														Change from
														March 31, 2014								June 30, 2013
		June 30,				March 31,				June 30,				Increase/				%				Increase/				%
		2014				2014				2013				(Decrease)				Change				(Decrease)				Change
Large Group
California			492				499				608				(7	)			(1.4	)%			(116	)			(19.1	)%
Arizona			48				50				64				(2	)			(4.0	)%			(16	)			(25.0	)%
Northwest			28				29				23				(1	)			(3.4	)%			5				21.7	%
			568				578				695				(10	)			(1.7	)%			(127	)			(18.3	)%
Small Group
California			240				239				241				1				0.4	%			(1	)			(0.4	)%
Arizona			43				40				42				3				7.5	%			1				2.4	%
Northwest			25				27				40				(2	)			(7.4	)%			(15	)			(37.5	)%
			308				306				323				2				0.7	%			(15	)			(4.6	)%
Individual
California			272				158				98				114				72.2	%			174				177.6	%
Arizona			99				47				14				52				110.6	%			85				607.1	%
Northwest			4				2				3				2				100.0	%			1				33.3	%
			375				207				115				168				81.2	%			260				226.1	%
Commercial Risk
California			1,004				896				947				108				12.1	%			57				6.0	%
Arizona			190				137				120				53				38.7	%			70				58.3	%
Northwest			57				58				66				(1	)			(1.7	)%			(9	)			(13.6	)%
			1,251				1,091				1,133				160				14.7	%			118				10.4	%
Medicare Advantage
California			162				156				146				6				3.8	%			16				11.0	%
Arizona			46				46				43				0				0.0	%			3				7.0	%
Northwest			54				53				47				1				1.9	%			7				14.9	%
			262				255				236				7				2.7	%			26				11.0	%
Medi-Cal/Medicaid
California			1,359				1,279				1,118				80				6.3	%			241				21.6	%
Arizona			45				18				0				27				150.0	%			45				0.0	%
			1,404				1,297				1,118				107				8.2	%			286				25.6	%
Dual Eligibles
California			2												2								2
Total Health Plan Enrollment
Large Group			568				578				695				(10	)			(1.7	)%			(127	)			(18.3	)%
Small Group			308				306				323				2				0.7	%			(15	)			(4.6	)%
Individual			375				207				115				168				81.2	%			260				226.1	%
Commercial Risk			1,251				1,091				1,133				160				14.7	%			118				10.4	%
Medicare Advantage			262				255				236				7				2.7	%			26				11.0	%
Medi-Cal/Medicaid			1,404				1,297				1,118				107				8.2	%			286				25.6	%
Dual Eligibles			2												2								2
Western Region Operations			2,919				2,643				2,487				276				10.4	%			432				17.4	%
TRICARE - North Contract Eligibles			2,849				2,851				2,865				(2	)			(0.1	)%			(16	)			(0.6	)%

 

10

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Health Net, Inc.

Consolidated Statements of Operations

($ in thousands, except per share data)

 

		Quarter Ended June 30, 2014				Quarter Ended March 31, 2014				Quarter Ended June 30, 2013
REVENUES:
Health plan services premiums		$	3,261,878			$	2,881,345			$	2,578,874
Government contracts			154,083				144,090				139,942
Net investment income			12,043				11,102				17,143
Administrative services fees and other income			(6,612	)			2,398				2,472
Total revenues			3,421,392				3,038,935				2,738,431
EXPENSES:
Health plan services			2,763,179				2,402,342				2,191,918
Government contracts			133,208				131,974				127,400
General and administrative			344,734				361,023				291,437
Selling			64,002				64,152				57,769
Depreciation and amortization			9,641				9,663				9,514
Interest			7,826				7,821				8,365
Total expenses			3,322,590				2,976,975				2,686,403
Income from operations before income taxes			98,802				61,960				52,028
Income tax (benefit) provision			(22,065	)			33,173				18,545
Net income		$	120,867			$	28,787			$	33,483
Net income per share:
Basic		$	1.51			$	0.36			$	0.42
Diluted		$	1.49			$	0.36			$	0.42
Weighted average shares outstanding:
Basic			80,250				79,802				79,367
Diluted			81,218				80,922				80,085

 

11

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Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)

 

		June 30,				March 31,				June 30,
		2014				2014				2013
ASSETS
Current Assets
Cash and cash equivalents		$	603,097			$	737,024			$	279,618
Investments - available for sale			1,668,943				1,685,009				1,632,466
Premiums receivable, net			849,089				450,224				579,206
Amounts receivable under government contracts			193,043				188,843				205,168
Other receivables			183,795				54,251				52,283
Deferred taxes			81,293				75,321				80,382
Other assets			259,878				254,702				119,015
Total current assets			3,839,138				3,445,374				2,948,138
Property and equipment, net			209,385				206,410				190,394
Goodwill			565,886				565,886				565,886
Other intangible assets, net			13,229				13,949				15,556
Deferred taxes			9,530				4,195				5,503
Investments - available for sale - noncurrent			652				4,255				18,332
Other noncurrent assets			139,205				190,550				137,644
Total Assets		$	4,777,025			$	4,430,619			$	3,881,453
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Reserves for claims and other settlements		$	1,488,322			$	1,151,958			$	1,013,086
Health care and other costs payable under government contracts			94,195				80,232				76,231
Unearned premiums			130,905				127,593				124,205
Accounts payable and other liabilities			496,349				669,406				392,647
Total current liabilities			2,209,771				2,029,189				1,606,169
Senior notes payable			399,402				399,351				399,197
Deferred taxes			22,376				18,057				—
Borrowings under revolving credit facility			100,000				100,000				125,000
Other noncurrent liabilities			223,595				205,521				226,863
Total Liabilities			2,955,144				2,752,118				2,357,229
Stockholders’ Equity
Common stock			152				152				150
Additional paid-in capital			1,406,768				1,397,962				1,360,749
Treasury common stock, at cost			(2,197,890	)			(2,197,538	)			(2,178,121	)
Retained earnings			2,613,302				2,492,435				2,377,055
Accumulated other comprehensive (loss) income			(451	)			(14,510	)			(35,609	)
Total Stockholders’ Equity			1,821,881				1,678,501				1,524,224
Total Liabilities and Stockholders’ Equity		$	4,777,025			$	4,430,619			$	3,881,453
Debt-to-Total Capital Ratio			21.5	%			22.9	%			25.6	%

 

12

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Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amounts in thousands)

 

		Quarter Ended				Quarter Ended				Quarter Ended
		June 30,				March 31,				June 30,
		2014				2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	120,867			$	28,787			$	33,483
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization and depreciation			9,641				9,663				9,514
Share-based compensation expense			6,536				9,164				6,942
Deferred income taxes			(14,653	)			18,129				9,169
Excess tax benefits from share-based compensation			(357	)			(997	)			(36	)
Net realized gain on sale on investments			(1,928	)			(308	)			(5,647	)
Other changes			6,364				9,562				6,845
Changes in assets and liabilities:
Premiums receivable and unearned premiums			(395,553	)			(16,588	)			(75,298	)
Other current assets, receivables and noncurrent assets			(69,421	)			(147,387	)			20,054
Amounts receivable/payable under government contracts			(492	)			34,089				3,160
Reserves for claims and other settlements			336,364				167,883				(84,658	)
Accounts payable and other liabilities			(11,118	)			199,461				(29,813	)
Net cash (used in) provided by operating activities			(13,750	)			311,458				(106,285	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments			125,751				66,499				218,593
Maturities of investments			19,210				24,469				21,346
Purchases of investments			(102,873	)			(125,564	)			(194,361	)
Purchases of property and equipment			(12,519	)			(17,437	)			(13,075	)
Sales and purchases of restricted investments and other			(2,777	)			3,537				(1,418	)
Net cash provided by (used in) investing activities			26,792				(48,496	)			31,085
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases			2,726				3,746				1,216
Repurchases of common stock			(1,226	)			(11,292	)			(70	)
Excess tax benefits from share-based compensation			357				997				36
Borrowings under financing arrangements			—				—				233,000
Repayment of borrowings under financing arrangements			—				—				(208,000	)
Net increase (decrease) in checks outstanding, net of deposits			(713	)			713				99,368
Customer funds administered			(148,113	)			46,743				(1,067	)
Net cash (used in) provided by financing activities			(146,969	)			40,907				124,483
Net (decrease) increase in cash and cash equivalents			(133,927	)			303,869				49,283
Cash and cash equivalents, beginning of period			737,024				433,155				230,335
Cash and cash equivalents, end of period		$	603,097			$	737,024			$	279,618

 

13

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Health Net, Inc.

SEGMENT INFORMATION

($ in thousands, except per share and PMPM data)

The following table presents Health Net’s operating segment information.

 

		Quarter Ended June 30, 2014																Quarter Ended March 31, 2014																Quarter Ended June 30, 2013
		Western Region Operations1				Government Contracts2				Corporate/ Other5				Consolidated				Western Region Operations1				Government Contracts2				Corporate/ Other3				Consolidated				Western Region Operations1				Government Contracts2				Corporate/ Other4				Consolidated
Commercial premiums		$	1,377,460											$	1,377,460			$	1,264,177											$	1,264,177			$	1,298,569											$	1,298,569
Medicare premiums			757,194												757,194				755,158												755,158				688,579												688,579
Medicaid premiums			1,121,912												1,121,912				862,010												862,010				591,726												591,726
Dual Eligibles premiums			5,312												5,312				0												0				0												0
Health plan services premiums			3,261,878												3,261,878				2,881,345												2,881,345				2,578,874												2,578,874
Government contracts							154,083								154,083								144,090								144,090								139,942								139,942
Net investment income			12,043												12,043				11,102												11,102				17,143												17,143
Administrative services fees and other income			(6,612	)											(6,612	)			2,398												2,398				2,472												2,472
Total revenues			3,267,309				154,083								3,421,392				2,894,845				144,090								3,038,935				2,598,489				139,942								2,738,431
Health plan services			2,763,179												2,763,179				2,402,342												2,402,342				2,191,918												2,191,918
Government contracts							132,634				574				133,208								131,070				904				131,974								121,826				5,574				127,400
Premium tax			31,930												31,930				42,458												42,458				51,167												51,167
Health insurer fee			37,844												37,844				36,293												36,293				—												—
Other ACA fees			22,546												22,546				22,527												22,527				569												569
Administrative expenses			249,665								2,749				252,414				256,594								3,151				259,745				232,377								7,324				239,701
Total general and administrative			341,985								2,749				344,734				357,872								3,151				361,023				284,113								7,324				291,437
Selling			64,002												64,002				64,152												64,152				57,769												57,769
Depreciation and amortization			9,641												9,641				9,663												9,663				9,514												9,514
Interest			7,826												7,826				7,821												7,821				8,365												8,365
Total expenses			3,186,633				132,634				3,323				3,322,590				2,841,850				131,070				4,055				2,976,975				2,551,679				121,826				12,898				2,686,403
Income (loss) from continuing operations before income taxes			80,676				21,449				(3,323	)			98,802				52,995				13,020				(4,055	)			61,960				46,810				18,116				(12,898	)			52,028
Income tax provision (benefit)			42,874				8,942				(73,881	)			(22,065	)			29,371				5,386				(1,584	)			33,173				16,023				7,537				(5,015	)			18,545
Income (loss) from continuing operations		$	37,802			$	12,507			$	70,558			$	120,867			$	23,624			$	7,634			$	(2,471	)		$	28,787			$	30,787			$	10,579			$	(7,883	)		$	33,483
Basic earnings (loss) per share from continuing operations		$	0.47			$	0.16			$	0.88			$	1.51			$	0.30			$	0.10			$	(0.03	)		$	0.36			$	0.39			$	0.13			$	(0.10	)		$	0.42
Diluted earnings (loss) per share from continuing operations		$	0.47			$	0.15			$	0.87			$	1.49			$	0.29			$	0.10			$	(0.03	)		$	0.36			$	0.39			$	0.13			$	(0.10	)		$	0.42
Basic weighted average shares outstanding			80,250				80,250				80,250				80,250				79,802				79,802				79,802				79,802				79,367				79,367				79,367				79,367
Diluted weighted average shares outstanding			81,218				81,218				81,218				81,218				80,922				80,922				79,802				80,922				80,085				80,085				79,367				80,085
Pretax margin			2.5	%															1.8	%															1.8	%
Commercial premium yield			-0.4	%															3.9	%															2.0	%
Commercial premium PMPM		$	378.91															$	400.34															$	380.30
Commercial health care cost trend			-3.4	%															-2.2	%															-2.3	%
Commercial health care cost PMPM		$	311.85															$	323.92															$	322.98
Commercial MCR			82.3	%															80.9	%															84.9	%
Medicare Advantage MCR			90.9	%															91.8	%															89.9	%
Medicaid MCR			83.6	%															79.8	%															79.5	%
Dual Eligibles MCR			60.0	%															—																—
Health plan services MCR			84.7	%															83.4	%															85.0	%
Administrative expense ratio			7.7	%															8.9	%															9.0	%
Total G&A expense ratio			10.5	%															12.4	%															11.0	%
Selling costs ratio			2.0	%															2.2	%															2.2	%

1

Includes the operations of the company’s commercial, Medicare and Medicaid health plans in California, Arizona, Oregon and Washington, as well as the operations of the company’s health and life insurance companies, primarily in Arizona, California, Oregon and Washington, and the operations of the company’s behavioral health and pharmaceutical services subsidiaries in several states including California, Arizona and Oregon.

 

2	Includes administrative services provided under the T-3 Managed Care Support Contract for the TRICARE North Region and other health care-related Department of Defense and Veterans Affairs government contracts.

 

3	Includes litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.

 

4	Primarily severance expense.

 

5	Includes $72.6 million income tax benefit. Also includes severance expense.

 

14

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Health Net, Inc.

Reconciliation of Reserves for Claims and Other Settlements

($ in millions)

 

		Health Plan Services
		YTD 6/2014				FY 2013				FY 2012
Reserve for claims (a), beginning of period		$	807.4			$	808.7			$	720.8
Incurred claims related to:
Current Year (f)			2,627.3				4,666.0				4,950.9
Prior Years (c)			(26.6	)			(56.2	)			34.5
Total Incurred (b)			2,600.7				4,609.8				4,985.4
Paid claims related to:
Current Year			1,665.3				3,872.5				4,156.6
Prior Years			731.6				738.6				740.9
Total Paid (b)			2,396.9				4,611.1				4,897.5
Reserve for claims (a), end of period			1,011.2				807.4				808.7
Add:
Claims Payable (d)			116.6				67.0				91.6
Other (e)			360.5				109.7				137.7
Reserves for claims and other settlements, end of period		$	1,488.3			$	984.1			$	1,038.0

 

(a)	Consists of incurred but not reported claims and received but unprocessed claims and reserves for loss adjustment expenses.

 

(b)	Includes medical claims only. Capitation, pharmacy and other payments including provider settlements are not included.

 

(c)

This line represents the change in reserves attributable to the difference between the original estimate of incurred claims for prior years and the revised estimate. Negative amounts in this line represent favorable development in estimated prior years’ health care costs. Positive amounts in this line represent unfavorable development in estimated prior years’ health care costs. For a detailed description of reserve development for the six months ended June 30, 2014, see Note 2 to the Consolidated Financial Statements in the company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2014. For a detailed description of reserve development for fiscal years 2013 and 2012, see Note 2 to the Consolidated Financial Statements in the company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

(d)	Includes amount accrued for litigation and regulatory-related expenses.

 

(e)	Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

 

(f)

Our IBNR estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. Such amounts were $67 million, $53 million and $53 million as of June 30, 2014, December 31, 2013, and December 31, 2012, respectively.

 

15