LOS ANGELES, February 01, 2011 - Health Net, Inc. (NYSE:HNT) today announced 2010 fourth quarter GAAP net income of $80.4 million, or $0.83 per diluted share, compared with a GAAP net loss of $45.2 million, or $0.43 per share, for the fourth quarter of 2009.
The company's Western Region Operations and Government Contracts segments produced combined net earnings of $0.80 per diluted share in the fourth quarter of 2010 and $0.79 per diluted share in the fourth quarter of 2009.
For the full year 2010, Health Net reported GAAP net income of $204.2 million, or $2.06 per diluted share, compared with a net loss of $49.0 million, or $0.47 per share, for the full year 2009.
The company's Western Region Operations and Government Contracts segments produced combined net earnings of $2.60 per diluted share for the full year 2010 and $2.58 per diluted share for the full year 2009.
"Our solid fourth quarter and full year 2010 results affirm that our ongoing efforts to sharpen the focus of the company continue to drive improved performance," said Jay Gellert, Health Net's chief executive officer. "Membership in our efficient-network commercial products is growing. Our balance sheet strengthened throughout 2010, and we ended the year with a debt-to-total capital ratio of less than 20 percent. Our strong results produced cash flow that supported more than $230 million of share repurchases in 2010.
"With a successful 2010 behind us, our goal is to achieve further improvement in 2011. We believe we have had the best open enrollment commercial selling season in many years, and this supports our view that we will achieve commercial enrollment growth in 2011. In addition, the preliminary government enrollment data shows that our 2011 Medicare Advantage enrollment is better than we expected when we issued our 2011 guidance in December 2010," Gellert added.
The fourth quarter 2010 GAAP results include:
- a $24.9 million noncash benefit to health plan expenses related to a litigation reserve true-up; and
- $13.0 million of expenses primarily related to litigation expenses and the company's overhead cost reduction efforts.
CONSOLIDATED RESULTS
Health Net's total revenues decreased 11.2 percent in the fourth quarter of 2010 to $3.4 billion from $3.8 billion in the fourth quarter of 2009. Health plan services premium revenues decreased by 16.5 percent in the fourth quarter of 2010 to $2.5 billion from $3.0 billion in the fourth quarter of 2009. Health plan services expenses decreased by 17.9 percent in the fourth quarter of 2010 to $2.1 billion from $2.6 billion in the fourth quarter of 2009.
Investment income decreased to $15.2 million in the fourth quarter of 2010 compared with $33.5 million in the fourth quarter of 2009.
The decreases on these year-over-year comparisons are primarily the result of the company's sale of its Northeast businesses in December 2009.
WESTERN REGION OPERATIONS SEGMENT
Health Plan Membership
Total health plan enrollment at December 31, 2010 was approximately 2.9 million members, a decrease of approximately 2.6 percent compared with enrollment at December 31, 2009. Total enrollment in the company's California health plan was essentially flat with 2.2 million members at both December 31, 2009 and December 31, 2010.
"Enrollment growth in our small group and midsize markets continues, driven by our innovative efficient-network products. The rate of in-group losses is steadily slowing as the economy stabilizes, supporting our belief that we can achieve commercial enrollment growth in 2011," said Jim Woys, Health Net's chief operating officer.
As of December 31, 2010, efficient-network products accounted for 23.0 percent of the company's Western Region commercial enrollment compared with 19.0 percent at December 31, 2009.
Commercial enrollment in the Western Region declined by 4.4 percent from December 31, 2009 to approximately 1.4 million members on December 31, 2010. The decline in commercial enrollment is consistent with overall weak employment levels in the company's western markets.
Medicaid enrollment in California at December 31, 2010 was 901,000 members, an increase of 44,000 members, or 5.1 percent, from December 31, 2009.
Enrollment in the company's Medicare Advantage plans in the Western Region at December 31, 2010 was 222,000 members, a decrease of 2.2 percent compared with December 31, 2009.
Membership in the company's Medicare Part D plans was 427,000 at the end of the fourth quarter of 2010, a 7.2 percent decrease compared with the end of the fourth quarter of 2009, and in-line with the company's expectations.
Revenues
Total revenues for the Western Region in the fourth quarter of 2010 were flat at $2.5 billion compared with the fourth quarter of 2009.
Investment income for the Western Region was $15.1 million in the fourth quarter of 2010 compared with $24.2 million in the fourth quarter of 2009 and $19.2 million in the third quarter of 2010.
Health Plan Services Expenses
Health plan services expenses in the Western Region were flat at $2.1 billion in the fourth quarter of 2010 compared with the fourth quarter of 2009.
Commercial Premium Yield and Health Care Cost Trends
In the Western Region, commercial premiums per member per month (PMPM) increased by 6.8 percent to approximately $344 in the fourth quarter of 2010 compared with $322 in the fourth quarter of 2009.
Commercial health care costs PMPM in the Western Region increased by 5.7 percent to approximately $294 in the fourth quarter of 2010 compared with approximately $278 in the fourth quarter of 2009.
"We continued to see growth in the commercial gross margin PMPM in the fourth quarter of 2010, as it increased approximately 13.5 percent from the fourth quarter of 2009," Woys noted.
Medical Care Ratios (MCR)
The health plan services MCR in the Western Region was 85.2 percent in the fourth quarter of 2010 compared with 85.8 percent in the fourth quarter of 2009. The full year 2010 health plan services MCR was 86.6 percent compared with 86.7 percent in 2009.
The Western Region commercial MCR was 85.5 percent in the fourth quarter of 2010 compared with 86.4 percent in the fourth quarter of 2009 and 86.3 percent in the third quarter of 2010. The full year 2010 commercial MCR was 86.1 percent compared with 86.8 percent for the full year 2009.
"The improvement in our commercial MCR is the result of continued pricing and underwriting discipline and less than expected health care cost increases," Woys added.
The Medicare Advantage (MA) MCR in the Western Region was 89.4 percent in the fourth quarter of 2010 compared with 88.6 percent in the fourth quarter of 2009.
The full year 2010 MA MCR in the Western Region was 88.8 percent compared with 88.1 percent for the full year 2009.
The company's Medicare Part D MCR was 53.1 percent in the fourth quarter of 2010 compared with 59.7 percent in the fourth quarter of 2009. The full year 2010 Part D MCR was 77.2 percent compared with 78.4 percent for the full year 2009.
General & Administrative (G&A) and Selling Expense
G&A expense in the Western Region was $230.9 million in the fourth quarter of 2010 compared with $215.2 million in the fourth quarter of 2009. The G&A expense ratio was 9.3 percent in the fourth quarter of 2010, and increased 50 basis points from 8.8 percent in the fourth quarter of 2009 and 60 basis points sequentially from 8.7 percent in the third quarter of 2010.
"The G&A ratio for the full year 2010 was 8.9 percent, within our 2010 guidance range of 8.8 percent to 9.0 percent. Our cost reduction efforts will continue to focus on reducing overhead in 2011," Woys added.
Selling expense in the Western Region was $63.9 million in the fourth quarter of 2010 compared with $58.9 million in the fourth quarter of 2009.
GOVERNMENT CONTRACTS SEGMENT
The company's Government Contracts revenues increased 9.0 percent in the fourth quarter of 2010 to $822.4 million from $754.8 million in the fourth quarter of 2009.
The Government Contracts cost ratio increased from 93.2 percent in the fourth quarter of 2009 to 93.7 percent in the fourth quarter of 2010.
BALANCE SHEET
Cash and investments as of December 31, 2010 were approximately $2.0 billion compared with approximately $2.1 billion as of December 31, 2009.
Reserves for claims and other settlements as of December 31, 2010 were $942.0 million compared with $951.7 million as of December 31, 2009 and $904.4 million as of September 30, 2010.
Days claims payable (DCP) for the fourth quarter of 2010 was 41.3 days compared with 34.2 days in the fourth quarter of 2009 and 39.0 days in the third quarter of 2010.
On an adjusted1 basis, DCP in the fourth quarter of 2010 was 57.3 days compared with 56.8 days in the fourth quarter of 2009 and 53.6 days in the third quarter of 2010.
The company's debt-to-total capital ratio was 19.0 percent as of December 31, 2010 compared with 26.2 percent as of December 31, 2009 and 22.7 percent as of September 30, 2010.
Interest expense was $8.1 million in the fourth quarter of 2010 compared with $9.5 million in the fourth quarter of 2009. This decline was due to the decrease in the company's total outstanding debt.
CASH FLOW
Operating cash flow was $214.6 million in the fourth quarter of 2010. The company did not receive $64.3 million in expected Medicaid payments from the state of California in the fourth quarter of 2010. The company received these payments in January 2011.
"For 2010, operating cash flow exceeded net income plus depreciation and amortization underscoring both the quality of our earnings and the tangible results of our organizational focus on cash flow generation," said Joseph Capezza, Health Net's chief financial officer.
NORTHEAST OPERATIONS SEGMENT
Health Net continues to serve the members of the sold Northeast companies under administrative services agreements (ASAs) that the company entered into with UnitedHealthcare and its affiliates on the closing date of the transaction. Health Net will serve these members until they are either transitioned to other UnitedHealthcare products or not renewed. The company expects the ASAs to remain in effect through the second quarter of 2011. After that time, the company will continue to pay run-out claims pursuant to claims servicing agreements with UnitedHealthcare and its affiliates.
The revenues and expenses associated with the company's Northeast Operations in the fourth quarter of 2010 were $49.7 million and $63.6 million, respectively, and they are shown separately in the accompanying Segment Information table.
SHARE REPURCHASE UPDATE
In the fourth quarter of 2010, Health Net repurchased 2.2 million shares for approximately $54.5 million at an average price of $26.76 per share. At December 31, 2010, approximately $149.8 million of authorization under the company's existing $300 million share repurchase program remained.
"With our strong cash position supported by operating cash flow and additional proceeds from the sale of our Northeast health plans, in 2010 we repurchased 9.1 million shares, or approximately 9.0 percent of the shares outstanding as of the end of 2009," said Capezza.