Western Region Operations and Government
Contracts Segments Produce Combined Net Income of
$58.5 Million, or $0.72 Per Diluted Share
Health Plan Enrollment Climbs
24.7 Percent Year-over-Year, and Surpasses 3 Million Members,
Driven by Continued Medicaid Growth from Expansion and Commercial
Growth from Individual Exchanges
Company Enters into Master Services
Agreement with Cognizant: Health Net Expects $150 to $200 Million
in Annual G&A and Depreciation Expense Savings by 2017
Health Net, Inc. (NYSE: HNT) today announced a 2014 third
quarter GAAP net loss of $8.9 million, or a loss of
$0.11 per share, compared with GAAP net income of
$66.8 million, or $0.83 per diluted share, for the third
quarter of 2013.
The company announced today in a separate press release that it
has entered into a master services agreement with a wholly owned
subsidiary of Cognizant Technology Solutions Corporation (NASDAQ:
CTSH) (Cognizant), a leading provider of information technology,
consulting and business process services.
Health Net previously announced on August 6, 2014, that it had
signed a Letter of Intent with Cognizant as part of Health Net’s
commitment to address Health Net’s scale issue and reduce
administrative costs.
The GAAP net loss resulted from approximately $106 million
of expenses incurred in the third quarter of 2014 related to the
company’s new master services agreement with Cognizant. The
$106 million is comprised of an approximately
$85 million, non-cash, impairment of the company’s information
technology assets that will be sold to Cognizant upon completion of
the transaction and approximately $21 million in other
transaction-related and other expenses.
“We believe the Cognizant transaction will help us address our
scale issue and enhance Health Net’s product development and
service capabilities. This in turn should strengthen our
competitive position for the long term,” explained Jay Gellert,
Health Net’s chief executive officer.
“The transaction-related costs incurred in the third quarter
were consistent with our earlier guidance regarding the cash impact
of such transaction expenses,” he added.
The company’s Western Region Operations (Western Region) and
Government Contracts segments produced combined net income of
$0.72 per diluted share in the third quarter of 2014 compared
with $0.83 per diluted share in the third quarter of 2013. The
company’s third quarter of 2013 benefited by approximately
$32 million in pretax income, or approximately $0.25 per
diluted share, from favorable California Medicaid rate adjustments
primarily for seniors and persons with disabilities members related
to prior periods.
Highlights from the third quarter of 2014 include:
- The company’s Western Region health
plans enrollment grew by 24.7 percent, or approximately
609,000 members, at September 30, 2014 compared with
enrollment at September 30, 2013, and grew by
5.3 percent, or approximately 156,000 members, at
September 30, 2014 compared with enrollment at June 30,
2014;
- Medicaid enrollment grew
11.5 percent sequentially and 39.0 percent between
September 30, 2013 and September 30, 2014. The expansion
of Medicaid eligibility under the Affordable Care Act (ACA)
continued to drive this growth in Arizona and California;
- The company’s commercial and Medicaid
lines of business continued to benefit from favorable underlying
health care cost trends. Commercial medical costs per member per
month (PMPM) declined by 0.7 percent in the third quarter of
2014 compared with the third quarter of 2013;
- In the third quarter of 2014, operating
cash flow was approximately $588 million as the company
received a fourth monthly Medi-Cal payment of approximately
$300 million and reserves for claims and other settlements
increased by approximately $245 million;
- Reserves for claims and other
settlements rose by 75.0 percent in the third quarter of 2014
compared with the third quarter of 2013, and by 16.5 percent
when compared with the second quarter of 2014; and
- The company resumed its share
repurchases in the third quarter. The company repurchased
3 million shares from September 10, 2014 through October
20, 2014, at a total cost of approximately $138 million.
“We are very pleased that our operating momentum continued in
the third quarter, driven by improvements in several key areas,”
said Gellert.
“Overall health plan enrollment topped 3 million members as
Medicaid enrollment exceeded expectations with further growth from
expansion lives and also from traditional Medicaid eligibles. The
commercial MCR improved year-over-year, helped by a favorable mix
and ongoing moderate cost trends,” he added.
“We continued to implement the duals eligible demonstration
pilots in Los Angeles and San Diego counties. Enrollment growth has
been somewhat slower than expected, similar to the early roll out
of Medicaid expansion. We are confident the program will work well
over time. We will remain conservative in our expectations but
aggressive in our execution,” Gellert noted.
CONSOLIDATED RESULTS
Health Net’s total revenues increased 36.6 percent in the
third quarter of 2014 to $3.8 billion from $2.8 billion
in the third quarter of 2013.
Health plan services premium revenues of approximately
$3.6 billion in the third quarter of 2014 increased by
39.3 percent compared with the third quarter of 2013.
Health plan services expenses increased by 41.3 percent to
approximately $3.1 billion in the third quarter of 2014
compared with the third quarter of 2013.
WESTERN REGION OPERATIONS SEGMENT
Health Plan Membership
Total enrollment in the Western Region at September 30,
2014 was approximately 3.1 million members, an increase of
24.7 percent from enrollment at September 30, 2013.
Total enrollment in the company’s California health plans at
September 30, 2014 was approximately 2.7 million members,
an increase of 20.7 percent from enrollment at
September 30, 2013.
Western Region commercial enrollment at September 30, 2014
was approximately 1.2 million, an increase of
11.7 percent compared with enrollment at September 30,
2013.
Membership in tailored network products represented
51.7 percent of the company’s Western Region commercial
membership at September 30, 2014 compared with
36.8 percent at September 30, 2013.
“Health Net’s success with our tailored network strategy is a
key factor driving our success in the exchanges,” said
Jim Woys, Health Net’s chief financial and operating officer
and interim treasurer. “We continue to expect tailored network
enrollment to be greater than 50 percent at December 31,
2014.”
Enrollment in the company’s Medicare Advantage (MA) plans in the
Western Region at September 30, 2014 was approximately
271,000 members, an increase of 13.4 percent compared
with enrollment of approximately 239,000 members at
September 30, 2013.
Medicaid enrollment in California increased 31.9 percent to
approximately 1.5 million members at September 30, 2014
compared with approximately 1.1 million members at
September 30, 2013.
Dual eligibles enrollment at September 30, 2014 was
approximately 9,000, an increase of 350.0 percent compared
with enrollment at June 30, 2014.
Revenues
Total revenues for the Western Region for the third quarter of
2014 were approximately $3.6 billion compared with
approximately $2.6 billion in the third quarter of 2013.
Net investment income for the Western Region was approximately
$11.0 million in the third quarter of 2014 compared with
approximately $12.0 million in the second quarter of 2014 and
$11.3 million in the third quarter of 2013.
Health Plan Services
Expenses
Health plan services expenses in the Western Region were
approximately $3.1 billion in the third quarter of 2014
compared with approximately $2.2 billion in the third quarter
of 2013.
Commercial Premium Yield and Health
Care Cost Trends
In the Western Region, commercial premiums PMPM decreased by
0.3 percent to approximately $386 in the third quarter of 2014
compared with approximately $387 in the third quarter of
2013.
Commercial health care costs PMPM in the Western Region
decreased by 0.7 percent to approximately $323 in the third
quarter of 2014 compared with approximately $326 in the third
quarter of 2013.
“Health care cost trends remained moderate in the third
quarter,” said Woys. “We also benefited from a significant and
favorable shift in our commercial business mix as individual
enrollment grew while large group business continued to decline, as
intended.”
Medical Care Ratios
(MCR)
The health plan services MCR in the Western Region was
85.5 percent in the third quarter of 2014 compared with
84.3 percent in the third quarter of 2013.
The Western Region commercial MCR was 83.9 percent in the
third quarter of 2014 compared with 84.2 percent in the third
quarter of 2013 and 82.3 percent in the second quarter of
2014.
The MA MCR in the Western Region was 90.8 percent in the
third quarter of 2014 compared with 89.9 percent in the third
quarter of 2013.
The Medicaid MCR was 84.2 percent in the third quarter of
2014 compared with 79.4 percent in the third quarter of
2013.
General and Administrative (G&A)
and Selling Expenses
G&A expenses in the Western Region were $353.4 million
in the third quarter of 2014 compared with $267.1 million in
the third quarter of 2013 and $342.0 million in the second
quarter of 2014. The G&A expense ratio was 9.7 percent in
the third quarter of 2014 compared with 10.2 percent in the
third quarter of 2013 and 10.5 percent in the second quarter
of 2014.
The G&A expense ratio in the Western Region also declined
sequentially and year-over-year in the third quarter of 2014. “We
remain focused on continued improvement in our administrative
efficiency as we pursue the required regulatory approval of our
Cognizant agreement,” stated Woys.
GOVERNMENT CONTRACTS SEGMENT
Government Contracts revenues in the third quarter of 2014 were
$146.2 million compared with $149.3 million in the third
quarter of 2013.
Government Contracts expenses in the third quarter of 2014 were
$123.6 million compared with $125.8 million in the third
quarter of 2013.
BALANCE SHEET
Cash and investments as of September 30, 2014 were
approximately $2.8 billion compared with approximately
$2.3 billion as of September 30, 2013.
Reserves for claims and other settlements as of
September 30, 2014 were $1.7 billion compared with
$990.2 million as of September 30, 2013 and
$1.5 billion as of June 30, 2014. Approximately
61.8 percent of the sequential increase in reserves for claims
and other settlements was the result of an increase in incurred but
not reported (IBNR) reserves.
Days claims payable (DCP) for the third quarter of 2014 was
51.4 days compared with 41.5 days in the third quarter of
2013 and 49.0 days in the second quarter of 2014.
On an adjusted1 basis, DCP for the third quarter of 2014 was
65.3 days compared with 61.1 days in the third quarter of
2013 and 64.4 days in the second quarter of 2014.
The company’s debt-to-total capital ratio was 22.1 percent
as of September 30, 2014 compared with 23.8 percent as of
September 30, 2013 and 21.5 percent as of June 30,
2014.
CASH FLOW FROM OPERATIONS
Operating cash flow was approximately $588.0 million in the
third quarter of 2014.
“Our strong operating cash flow was primarily the result of the
receipt of a fourth Medi-Cal payment of approximately
$300 million in the quarter and a $245 million increase
in reserves for claims and other settlements,” said Woys.
The company noted that cash at the parent was approximately
$271 million at September 30, 2014.
STOCK REPURCHASE UPDATE
During the third quarter of 2014, Health Net repurchased
approximately 1.5 million shares of its common stock for
approximately $69.0 million at an average price of
$46.54 per share. At September 30, 2014, approximately
$211.0 million of authorization under the company’s existing
$400 million share repurchase program remained.
“We continue to believe that share repurchase is our best option
at this time for capital deployment,” Gellert explained.
“We are updating our guidance for weighted-average fully diluted
shares outstanding in 2014 to approximately 81 million shares
from our prior guidance of 80 million shares,” he added.
2014 GUIDANCE
The company is revising GAAP earnings per diluted share to at
least $1.95 from at least $3.00 for the full year 2014, due to the
impact of incurred and expected costs related to the Cognizant
transaction. The company also is raising the Western Region and
Government Contracts earnings per share to at least $2.25 from at
least $2.22 for the full year 2014.
The table included in this release provides specific 2014
guidance metrics, including updates to expectations for large
group, small group, individual, Medicare Advantage, Medicaid, dual
eligibles and total health plan membership; commercial, Medicare
Advantage, state health plans, dual eligibles, total health plans
and total consolidated revenues; the Medicaid MCR; tax rates;
weighted-average fully diluted shares outstanding; GAAP earnings
per diluted share (EPS); and Western Region and Government
Contracts EPS.
CONFERENCE CALL
As previously announced, Health Net will discuss the company’s
third quarter 2014 financial results during a conference call on
Monday, November 3, 2014, beginning at approximately
11:00 a.m. Eastern time. The live conference call should be
accessed at least 15 minutes prior to its start with the following
numbers:
(877) 407-4019 (Live – Domestic Toll-Free)
(877) 660-6853 (Replay – Domestic Toll-Free) (201) 689-8337
(Live – International) (201) 612-7415 (Replay – International)
The access code for the live conference call and replay is
13591799. A replay of the conference call will be available through
November 8, 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, and
Quarterly Reports on Form 10-Q for the quarterly periods ended
March 31, 2014 and June 30, 2014, and other reports filed
by Health Net 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 5.9 million
individuals across the country through group, individual, Medicare
(including the Medicare prescription drug benefit commonly referred
to as “Part D”), Medicaid, U.S. Department of Defense, including
TRICARE, and Veterans Affairs programs. Through its subsidiaries,
Health Net also offers behavioral health, substance abuse and
employee assistance programs, managed health care products related
to prescription drugs, managed health care product coordination for
multi-region employers, and administrative services for medical
groups and self-funded benefits programs.
For more information on Health Net, Inc., please visit the
company’s website at www.healthnet.com.
CAUTIONARY STATEMENTS
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, including the
guidance for future periods and the assumptions underlying such
projections, may be deemed to be forward-looking statements and as
such are intended to be covered by the safe harbor for
“forward-looking statements” provided by PSLRA. These statements
are based on management’s analysis, judgment, belief and
expectation only as of the date hereof, and are subject to changes
in circumstances and a number of risks and uncertainties. Without
limiting the foregoing, the guidance as to expected future period
results and statements including the words “believes,”
“anticipates,” “plans,” “expects,” “may,” “should,” “could,”
“estimate,” “intend,” “feels,” “will,” “projects” and other similar
expressions are intended to identify forward-looking statements.
Actual results could differ materially from those expressed in, or
implied or projected by the forward-looking information and
statements due to, among other things, health care reform and other
increased government participation in and 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, including through our master
services agreement with Cognizant; whether we receive required
regulatory approvals for Cognizant’s provision of services to us
and any conditions imposed in order to obtain such regulatory
approvals; our ability to recognize the intended cost savings and
other intended benefits of the Cognizant transaction; and the risk
that Cognizant may not perform contracted functions and services in
a timely, satisfactory and compliant manner; 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 Reports 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 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, 2014.
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 September 30, 2014, and
Item 2.02 in the company’s Form 8-K filed with the
Securities and Exchange Commission on November 3, 2014.
Health Net, Inc.
2014 GAAP Guidance (1)
MEMBERSHIP Current
Previous (updated
11/3/14) (as of 8/6/14)
Enrollment Enrollment at 12/31/2014
at 12/31/2014
Commercial
Large Group 551,000 560,000 Small Group 298,000 280,000 Individual
364,000 380,000 Total Commercial 1,213,000 1,220,000
Medicare Advantage
278,000
260,000
Medicaid 1,726,000 1,585,000
Dual
Eligibles
20,000
38,000
Total Health Plan Membership 3,233,000
3,103,000
Premium Revenues
FY2014 FY2014 Commercial
$5.5 billion $5.6 billion Medicare Advantage $3.1 billion $3.0
billion State Health Plans $4.9 billion $4.5 billion Dual Eligibles
$130 million
$342 million Total Health Plans $13.6 billion $13.4 billion
Total Consolidated Revenues $14.2 billion $14.0
billion Medical Care Ratios (MCR)
FY2014 FY2014
Commercial 83.0% 83.0% Medicare Advantage 90.9% 90.9% Medicaid
82.9% 83.6% Dual Eligibles 86.5% 86.5%
G&A
Expense Ratio 10.8% 10.8%
Tax
Rate(2) 28.0% 31.1%
Western Region and Government Contracts
Tax Rate(3)
51.1% 51.5%
Weighted-average fully diluted shares
outstanding
80.8 million 80 million
GAAP Earnings per Diluted Share
(EPS)(2) At least $1.95 At least $3.00
Western Region and
Government Contracts
EPS(3)
At least $2.25 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
Health Net,
Inc. Enrollment Data - By State (In thousands)
Change
from June 30, 2014 September 30,
2013 September 30, June 30, September
30, Increase/ %
Increase/ %
2014 2014 2013
(Decrease) Change
(Decrease) Change
California Large Group 477 492 576 (15 ) (3.0 )% (99 ) (17.2 )%
Small Group 243 240 241 3 1.3 % 2 0.8 % Individual 269
272 105 (3 ) (1.1
)% 164 156.2 % Commercial Risk
989 1,004 922 (15 ) (1.5 )% 67 7.3 % Medicare Advantage 169 162 149
7 4.3 % 20 13.4 % Medi-Cal 1,485 1,359 1,126 126 9.3 % 359 31.9 %
Dual Eligibles 9 2 0
7 350.0 % 9
0.0
%
Total California 2,652 2,527
2,197 125 4.9 %
455 20.7 % Arizona Large Group
45 48 59 (3 ) (6.3 )% (14 ) (23.7 )% Small Group 44 43 40 1 2.3 % 4
10.0 % Individual 97 99 14
(2 ) (2.0 )% 83
592.9 % Commercial Risk 186 190 113 (4 ) (2.1 )% 73 64.6 %
Medicare Advantage 46 46 43 0 0.0 % 3 7.0 % Medicaid
80 45 0 35
77.8 % 80
0.0
%
Total Arizona 312 281 156
31 11.0 % 156
100.0 % Northwest Large Group 28 28 24
0 0.0 % 4 16.7 % Small Group 23 25 39 (2 ) (8.0 )% (16 ) (41.0 )%
Individual 4 4 3 0
0.0 % 1 33.3 %
Commercial Risk 55 57 66 (2 ) (3.5 )% (11 ) (16.7 )% Medicare
Advantage 56 54 47
2 3.7 % 9
19.1 % Total Northwest 111 111
113 0 0.0 %
(2 ) (1.8 )%
Total Health Plan Enrollment Large Group 550
568 659 (18 ) (3.2 )% (109 ) (16.5 )% Small Group 310 308 320 2 0.6
% (10 ) (3.1 )% Individual 370 375 122
(5 ) (1.3 )% 248
203.3 % Commercial Risk 1,230 1,251 1,101 (21 ) (1.7
)% 129 11.7 % Medicare Advantage 271 262 239 9 3.4 % 32 13.4 %
Medi-Cal/Medicaid 1,565 1,404 1,126 161 11.5 % 439 39.0 % Dual
Eligibles 9 2 0 7
350.0 % 9
0.0
%
Western Region Operations 3,075
2,919 2,466 156
5.3 % 609 24.7 %
TRICARE - North Contract Eligibles 2,849
2,849 2,865 0
0.0 % (16 ) (0.6 )%
Health Net, Inc. Enrollment Data - Line of
Business (In thousands)
Change from June 30,
2014 September 30, 2013
September 30, June 30, September 30,
Increase/ %
Increase/ %
2014 2014 2013
(Decrease) Change
(Decrease) Change
Large Group California 477 492 576 (15 ) (3.0 )% (99 ) (17.2 )%
Arizona 45 48 59 (3 ) (6.3 )% (14 ) (23.7 )% Northwest 28
28 24 0 0.0
% 4 16.7 % 550 568
659 (18 ) (3.2 )%
(109 ) (16.5 )% Small Group California
243 240 241 3 1.3 % 2 0.8 % Arizona 44 43 40 1 2.3 % 4 10.0 %
Northwest 23 25 39 (2 )
(8.0 )% (16 ) (41.0 )%
310 308 320 2
0.6 % (10 ) (3.1 )%
Individual California 269 272 105 (3 ) (1.1 )% 164 156.2 %
Arizona 97 99 14 (2 ) (2.0 )% 83 592.9 % Northwest 4
4 3 0 0.0 %
1 33.3 % 370 375
122 (5 ) (1.3 )%
248 203.3 % Commercial Risk California
989 1,004 922 (15 ) (1.5 )% 67 7.3 % Arizona 186 190 113 (4 ) (2.1
)% 73 64.6 % Northwest 55 57 66
(2 ) (3.5 )% (11 )
(16.7 )% 1,230 1,251 1,101
(21 ) (1.7 )% 129
11.7 % Medicare Advantage California 169 162 149 7
4.3 % 20 13.4 % Arizona 46 46 43 0 0.0 % 3 7.0 % Northwest 56
54 47 2
3.7 % 9 19.1 % 271
262 239 9
3.4 % 32 13.4 %
Medi-Cal/Medicaid California 1,485 1,359 1,126 126 9.3 % 359 31.9 %
Arizona 80 45 0 35
77.8 % 80
0.0
%
1,565 1,404 1,126 161
11.5 % 439
39.0 % Dual Eligibles
California 9
2 0 7 350.0
% 9
0.0
%
Total Health Plan
Enrollment Large Group 550 568 659 (18 ) (3.2 )% (109 ) (16.5
)% Small Group 310 308 320 2 0.6 % (10 ) (3.1 )% Individual 370
375 122 (5 )
(1.3 )% 248 203.3 %
Commercial Risk 1,230 1,251 1,101 (21 ) (1.7 )% 129 11.7 % Medicare
Advantage 271 262 239 9 3.4 % 32 13.4 % Medi-Cal/Medicaid 1,565
1,404 1,126 161 11.5 % 439 39.0 % Dual Eligibles 9 2
0 7 350.0 %
9
0.0
%
Western Region Operations 3,075
2,919 2,466 156
5.3 % 609 24.7 %
TRICARE - North Contract Eligibles 2,849
2,849 2,865 0
0.0 % (16 ) (0.6 )%
Health Net, Inc.
Consolidated Statements of
Operations
($ in thousands, except per share
data)
Quarter Ended
Quarter Ended Quarter Ended September 30, June
30, September 30,
REVENUES: 2014 2014 2013 Health plan
services premiums $ 3,631,617 $ 3,261,878 $ 2,606,754 Government
contracts 146,183 154,083 149,342 Net investment income 10,964
12,043 11,276 Administrative services fees and other income
1,106 (6,612 ) 7,659 Total revenues
3,789,870 3,421,392 2,775,031
EXPENSES: Health plan services 3,104,010 2,763,179 2,196,561
Government contracts 124,403 133,208 125,334 General and
administrative 373,623 344,734 267,683 Selling 66,111 64,002 59,498
Depreciation and amortization 6,500 9,641 9,402 Interest 7,810
7,826 7,973 Asset impairment 84,690
-
-
Total expenses 3,767,147 3,322,590
2,666,451 Income from operations before income taxes 22,723
98,802 108,580 Income tax provision (benefit) 31,662
(22,065 ) 41,740 Net (loss) income $ (8,939 ) $
120,867 $ 66,840 Net (loss) income per share: Basic $
(0.11 ) $ 1.51 $ 0.84 Diluted $ (0.11 ) $ 1.49 $ 0.83
Weighted average shares outstanding: Basic 80,235 80,250 79,432
Diluted 80,235 81,218 80,441
Health Net, Inc.
Condensed Consolidated Balance
Sheets
(Amounts in thousands, except ratio
data)
September 30, June
30, September 30, 2014 2014 2013
ASSETS
Current Assets Cash and cash equivalents $ 1,114,558 $ 603,097 $
686,139 Investments - available for sale 1,664,830 1,668,943
1,580,032 Premiums receivable, net 579,515 849,089 343,502 Amounts
receivable under government contracts 143,662 193,043 194,820 Other
receivables 307,369 183,795 69,885 Deferred taxes 71,434 81,293
78,257 Assets held for sale 50,000 - - Other assets 157,066
259,878 103,685 Total current
assets 4,088,434 3,839,138 3,056,320 Property and equipment, net
92,193 209,385 195,954 Goodwill 558,886 565,886 565,886 Other
intangible assets, net 12,526 13,229 14,699 Deferred taxes 34,580
9,530 3,394 Investments - available for sale - noncurrent 3,055 652
52,637 Other noncurrent assets 173,230 139,205
152,611 Total Assets $ 4,962,904 $
4,777,025 $ 4,041,501
LIABILITIES AND
STOCKHOLDERS' EQUITY Current Liabilities Reserves for claims
and other settlements $ 1,733,307 $ 1,488,322 $ 990,195 Health care
and other costs payable under government contracts 62,796 94,195
55,532 Unearned premiums 125,363 130,905 129,081 Accounts payable
and other liabilities 540,968 496,349
544,704 Total current liabilities 2,462,434 2,209,771
1,719,512 Senior notes payable 399,453 399,402 399,248 Deferred
taxes - 22,376 1,746 Borrowings under revolving credit facility
100,000 100,000 100,000 Other noncurrent liabilities 235,393
223,595 220,404 Total
Liabilities 3,197,280 2,955,144
2,440,910 Stockholders' Equity Common stock 152 152
150 Additional paid-in capital 1,432,513 1,406,768 1,370,744
Treasury common stock, at cost (2,272,180 ) (2,197,890 ) (2,179,503
) Retained earnings 2,604,363 2,613,302 2,443,895 Accumulated other
comprehensive income (loss) 776 (451 )
(34,695 ) Total Stockholders' Equity 1,765,624
1,821,881 1,600,591 Total Liabilities and
Stockholders' Equity $ 4,962,904 $ 4,777,025 $
4,041,501 Debt-to-Total Capital Ratio 22.1 % 21.5 %
23.8 %
Health Net, Inc.
Condensed Consolidated Statements of
Cash Flows
(Amounts in thousands)
Quarter Ended
Quarter Ended Quarter Ended September 30, June
30, September 30, 2014 2014 2013
CASH FLOWS FROM
OPERATING ACTIVITIES: Net (loss) income $ (8,939 ) $ 120,867 $
66,840
Adjustments to reconcile net (loss) income
to net cash provided by (used in) operating activities:
Amortization and depreciation 6,500 9,641 9,402 Share-based
compensation expense 6,109 6,536 6,511 Deferred income taxes
(38,231 ) (14,653 ) 5,573 Excess tax benefits from share-based
compensation (241 ) (357 ) (21 ) Asset impairment 84,690 - - Net
realized gain on sale on investments (346 ) (1,928 ) (370 ) Other
changes 7,264 6,364 8,040 Changes in assets and liabilities:
Premiums receivable and unearned premiums 264,032 (395,553 )
240,580 Other current assets, receivables and noncurrent assets
(34,671 ) (69,421 ) (1,528 ) Amounts receivable/payable under
government contracts 12,369 (492 ) 2,013 Reserves for claims and
other settlements 244,985 336,364 (22,891 ) Accounts payable and
other liabilities 44,434 (11,118 )
(11,954 ) Net cash provided by (used in) operating activities
587,955 (13,750 ) 302,195
CASH FLOWS FROM INVESTING ACTIVITIES: Sales of investments
104,628 125,751 80,380 Maturities of investments 21,064 19,210
21,396 Purchases of investments (133,014 ) (102,873 ) (92,602 )
Purchases of property and equipment (18,439 ) (12,519 ) (15,831 )
Sales and purchases of restricted investments and other
2,002 (2,777 ) (2,108 ) Net cash (used in)
provided by investing activities (23,759 ) 26,792
(8,765 )
CASH FLOWS FROM FINANCING
ACTIVITIES: Proceeds from exercise of stock options and
employee stock purchases 14,945 2,726 2,469 Repurchases of common
stock (57,168 ) (1,226 ) (105 ) Excess tax benefits from
share-based compensation 241 357 21 Borrowings under financing
arrangements - - - Repayment of borrowings under financing
arrangements - - (25,000 ) Net increase (decrease) in checks
outstanding, net of deposits - (713 ) (99,394 ) Customer funds
administered (10,753 ) (148,113 ) 235,100
Net cash (used in) provided by financing activities
(52,735 ) (146,969 ) 113,091 Net
increase (decrease) in cash and cash equivalents 511,461 (133,927 )
406,521 Cash and cash equivalents, beginning of period
603,097 737,024 279,618 Cash and
cash equivalents, end of period $ 1,114,558 $ 603,097
$ 686,139
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 September 30, 2014
Quarter Ended June 30, 2014
Quarter Ended September 30, 2013
Western Region Government Corporate/ Western
Region Government
Corporate/
Western Region Government Corporate/
Operations1 Contracts2 Other4 Consolidated
Operations1 Contracts2 Other5 Consolidated
Operations1 Contracts2 Other3 Consolidated
Commercial premiums $ 1,430,769 $ 1,430,769 $
1,377,460 $ 1,377,460 $ 1,279,834 $ 1,279,834 Medicare premiums
763,327 763,327 757,194 757,194 685,340 685,340 Medicaid premiums
1,397,732 1,397,732 1,121,912 1,121,912 641,580 641,580 Dual
Eligibles premiums 39,789
39,789 5,312
5,312 0
0 Health plan services premiums
3,631,617 3,631,617 3,261,878 3,261,878 2,606,754 2,606,754
Government contracts 146,183 146,183 154,083 154,083 149,342
149,342 Net investment income 10,964 10,964 12,043 12,043 11,276
11,276 Administrative services fees and other income 1,106
1,106
(6,612 ) (6,612 )
7,659 7,659
Total revenues 3,643,687 146,183 3,789,870 3,267,309 154,083
3,421,392 2,625,689 149,342 2,775,031 Health plan services
3,104,010 3,104,010 2,763,179 2,763,179 2,196,561 2,196,561
Government contracts 123,571 832 124,403 132,634 574 133,208
125,841 (507 ) 125,334 Premium tax 53,417 53,417 31,930 31,930
33,399 33,399 Health insurer fee 31,947 31,947 37,844 37,844 - -
Other ACA fees 26,643 26,643 22,546 22,546 552 552 Administrative
expenses 241,352 20,264
261,616 249,665
2,749 252,414
233,135 597
233,732 Total general and administrative 353,359 20,264
373,623 341,985 2,749 344,734 267,086 597 267,683 Selling 66,111
66,111 64,002 64,002 59,498 59,498 Depreciation and amortization
6,500 6,500 9,641 9,641 9,402 9,402 Interest 7,810 7,810 7,826
7,826 7,973 7,973 Asset impairment
84,690 84,690
Total expenses 3,537,790
123,571 105,786 3,767,147
3,186,633 132,634
3,323 3,322,590 2,540,520
125,841 90
2,666,451 Income (loss) from operations before income taxes 105,897
22,612 (105,786 ) 22,723 80,676 21,449 (3,323 ) 98,802 85,169
23,501 (90 ) 108,580 Income tax provision (benefit) 61,085
8,918 (38,341 )
31,662 42,874 8,942
(73,881 ) (22,065 ) 32,184
9,591 (35 ) 41,740 Income
(loss) from operations $ 44,812 $ 13,694 $
(67,445 ) $ (8,939 ) $ 37,802 $ 12,507
$ 70,558 $ 120,867 $ 52,985 $
13,910 $ (55 ) $ 66,840 Basic earnings (loss)
per share $ 0.56 $ 0.17 $ (0.84 ) $ (0.11 ) $ 0.47 $ 0.16 $ 0.88 $
1.51 $ 0.67 $ 0.18 $ - $ 0.84 Diluted earnings (loss) per share $
0.55 $ 0.17 $ (0.84 ) $ (0.11 ) $ 0.47 $ 0.15 $ 0.87 $ 1.49 $ 0.66
$ 0.17 $ - $ 0.83 Basic weighted average shares outstanding
80,235 80,235 80,235 80,235 80,250 80,250 80,250 80,250 79,432
79,432 79,432 79,432 Diluted weighted average shares outstanding
81,513 81,513 80,235 80,235 81,218 81,218 81,218 81,218 80,441
80,441 79,432 80,441 Pretax margin 2.9 % 2.5 % 3.2 %
Commercial premium yield -0.3 % -0.4 % 2.6 % Commercial premium
PMPM $ 385.67 $ 378.91 $ 386.69 Commercial health care cost trend
-0.7 % -3.4 % -0.3 % Commercial health care cost PMPM $ 323.43 $
311.85 $ 325.62 Commercial MCR 83.9 % 82.3 % 84.2 % Medicare
Advantage MCR 90.8 % 90.9 % 89.9 % Medicaid MCR 84.2 % 83.6 % 79.4
% Dual Eligibles MCR 87.4 % 60.0 % - Health plan services MCR 85.5
% 84.7 % 84.3 % Administrative expense ratio 6.6 % 7.7 % 8.9 %
Total G&A expense ratio 9.7 % 10.5 % 10.2 % Selling costs ratio
1.8 % 2.0 % 2.3 % 1
Includes the operations of the company's
commercial, Medicare, Medicaid and Dual Eligibles 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 reserve true-up related to previous accrual
for severance expenses. 4 Includes primarily costs related
to the company's entrance into a master services agreement and
related asset purchase agreement with Cognizant and asset
impairment of $84.7 million. 5 Includes $72.6 million income
tax benefit. Also includes severance expense.
Health Net, Inc. Reconciliation of Reserves for Claims
and Other Settlements ($ in millions)
Health Plan Services YTD 9/2014
FY 2013 FY 2012 Reserve for
claims (a), beginning of period $ 807.4 $ 808.7 $ 720.8 Incurred
claims related to: Current Year (f) 4,121.1 4,666.0 4,950.9 Prior
Years (c) (16.9 ) (56.2 ) 34.5 Total Incurred
(b) 4,104.2 4,609.8 4,985.4 Paid claims related to: Current
Year 2,988.9 3,872.5 4,156.6 Prior Years 760.0
738.6 740.9 Total Paid (b) 3,748.9
4,611.1 4,897.5 Reserve for
claims (a), end of period 1,162.7 807.4 808.7 Add: Claims Payable
(d) 129.4 67.0 91.6 Other (e) 441.2 109.7 137.7
Reserves for claims and other settlements, end of
period $ 1,733.3 $ 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
nine months ended September 30, 2014, see Note 2 to the
Consolidated Financial Statements in the company's Quarterly Report
on Form 10-Q for the quarter ended September 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 $77 million, $53
million and $53 million as of September 30, 2014, December 31,
2013, and December 31, 2012, respectively.
Investor Contact:The Abernathy MacGregor GroupDavid
Olson818-917-1469dwo@abmac.comorMedia Contact:Health
Net, Inc.Brad
Kieffer818-676-6833brad.kieffer@healthnet.com
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