Health Net reports third quarter 2010 net income of $62.7 million, or $0.64 per diluted share

Western Region Operations and Government Contracts Segments Produce Combined Earnings of $0.74 Per Diluted Share

Commercial Risk Enrollment Grows Sequentially

LOS ANGELES--(BUSINESS WIRE)-- Health Net, Inc. (NYSE: HNT) today announced 2010 third quarter GAAP net income of $62.7 million, or $0.64 per diluted share, compared with a GAAP net loss of $66.0 million, or $0.64 per diluted share, for the third quarter of 2009.

The third quarter 2010 GAAP results include $8.6 million in expenses primarily related to severance costs.

The company’s Western Region Operations and Government Contracts segments produced combined net earnings of $0.74 per diluted share in the third quarter of 2010 and $0.75 per diluted share in the third quarter of 2009.

“We are pleased that the third quarter of 2010 produced further evidence of our solid and consistent financial performance,” said Jay Gellert, president and chief executive officer of Health Net, Inc. “Our commercial risk enrollment grew by 3,000 members sequentially, reversing recent trends and demonstrating that our focus on efficient-network products is working.”

The company announced that it is raising its full year 2010 guidance for earnings per diluted share to $2.07 to $2.17 on a GAAP basis, and $2.55 to $2.58 for the combined Western Region Operations and Government Contracts segments.

“Based on our current outlook, we believe that operating income for the full year 2011 will be greater than in 2010,” said Gellert. “In addition, we currently anticipate continued share repurchase activity in 2011.”

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 14.5 percent in the third quarter of 2010 to $3.4 billion from $4.0 billion in the third quarter of 2009. Health plan services premium revenues decreased by approximately 22.0 percent to $2.5 billion in the third quarter of 2010 compared with $3.2 billion in the third quarter of 2009. Health plan services expenses decreased to $2.1 billion in the third quarter of 2010 from $2.7 billion in the third quarter of 2009.

Investment income decreased to $19.5 million in the third quarter of 2010 compared with $27.7 million in the third 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 enrollment in the Western Region Operations segment at September 30, 2010 was approximately 2.5 million members, a decrease of approximately 1.7 percent compared with enrollment at September 30, 2009. Total enrollment in the company’s California health plan decreased approximately 0.5 percent from September 30, 2009 to September 30, 2010.

Western Region commercial risk enrollment grew by 3,000 members from June 30, 2010 to September 30, 2010.

“In light of the current economic environment, we find this growth in our Western Region commercial risk products very encouraging,” said James Woys, Health Net’s chief operating officer. “Also, our strategy of emphasizing efficient-network products continues to produce share gains in our key markets. These products grew by 11.2 percent, or 30,000 new members, from September 30, 2009 to September 30, 2010.”

As of September 30, 2010, efficient-network products accounted for 22 percent of the company’s Western Region commercial enrollment compared with 19 percent at September 30, 2009.

Commercial enrollment in the Western Region declined by 6.4 percent from September 30, 2009 to approximately 1.4 million members on September 30, 2010. The decline in commercial enrollment is consistent with the overall weak economy in the company’s western markets.

Medicaid enrollment in California at September 30, 2010 was 896,000 members, an increase of 55,000 members, or 6.5 percent, from September 30, 2009.

Enrollment in the company’s Medicare Advantage plans in the Western Region at September 30, 2010 was 221,000 members, a decrease of 1.8 percent compared with September 30, 2009.

Membership in the company’s Medicare Part D plans was 432,000 at the end of the third quarter of 2010, a 7.3 percent decrease compared with the end of the third quarter of 2009. The company’s Medicare Part D plans are currently offered in 49 states and the District of Columbia and were offered in all 50 states and the District of Columbia in the third quarter of 2009.

Revenues

Total revenues for the Western Region in the third quarter of 2010 were flat at approximately $2.5 billion compared with the third quarter of 2009.

Investment income for the Western Region was $19.2 million in the third quarter of 2010 compared with $21.2 million in the third quarter of 2009 and $16.3 million in the second quarter of 2010.

Health Plan Services Expenses

Health plan services expenses in the Western Region were flat at approximately $2.1 billion in the third quarter of 2010 compared with the third quarter of 2009.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 7.2 percent to approximately $343 in the third quarter of 2010 compared with $320 in the third quarter of 2009.

Commercial health care costs PMPM in the Western Region increased by 5.2 percent to approximately $296 in the third quarter of 2010 compared with approximately $281 in the third quarter of 2009.

“The positive spread between commercial premium yields PMPM and health care costs PMPM and the resulting year-over-year increase in the commercial gross margin PMPM in the Western Region is further affirmation of both our product strategy and pricing discipline,” said Woys.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 86.3 percent in the third quarter of 2010 compared with 86.9 percent in the third quarter of 2009.

The Western Region commercial MCR was 86.3 percent in the third quarter of 2010 compared with 87.9 percent in the third quarter of 2009 and was flat sequentially.

“The year-over-year improvement in our commercial MCR is the result of continued pricing discipline and more moderate health care cost increases,” Woys added.

The Medicare Advantage MCR in the Western Region was 89.4 percent in the third quarter of 2010 compared with 88.4 percent in the third quarter of 2009 and was in-line with company expectations.

The Medicare Part D MCR was 64.6 percent in the third quarter of 2010 compared with 65.9 percent in the third quarter of 2009. The 130 basis point improvement is consistent with the company’s 2010 bid strategy.

General & Administrative (G&A) and Selling Expenses

G&A expense in the Western Region was $214.3 million in the third quarter of 2010 compared with $201.8 million in the third quarter of 2009. The G&A expense ratio increased 60 basis points from 8.1 percent in the third quarter of 2009 and 20 basis points sequentially from 8.5 percent in the second quarter of 2010 to 8.7 percent in the third quarter of 2010.

“The year-over-year increase in the G&A ratio in the Western Region segment was consistent with our expectations,” said Woys. “We continue to expect that the G&A ratio for the full year 2010 will be 8.8 percent to 9.0 percent.”

Selling expense in the Western Region was $58.3 million in the third quarter of 2010 compared with $58.0 million in the third quarter of 2009.

GOVERNMENT CONTRACTS SEGMENT

The company’s Government Contracts revenues increased 13.5 percent in the third quarter of 2010 to $860.7 million from $758.5 million in the third quarter of 2009.

The Government Contracts cost ratio increased slightly from 94.4 percent in the third quarter of 2009 to 94.5 percent in the third quarter of 2010.

BALANCE SHEET

Health Net’s Condensed Consolidated Balance Sheets, attached as an exhibit to this press release, included the Northeast businesses in the third quarter of 2009. The company sold its Northeast businesses in December 2009, and as a result, the balance sheets exclude those businesses in the fourth quarter of 2009 and the first, second and third quarters of 2010.

Cash and investments as of September 30, 2010 were $1.9 billion compared with $1.8 billion as of September 30, 2009.

Reserves for claims and other settlements as of September 30, 2010 were $904.4 million compared with $951.8 million as of September 30, 2009 and $934.9 million as of June 30, 2010. The year-over-year decline is primarily due to a reduction in claims inventory. The sequential decline is primarily due to a $22.0 million payment to providers related to Medicare risk adjusters and a $15.0 million decline in claims inventory.

Days claims payable (DCP) for the third quarter of 2010 was 39.0 days compared with 40.2 days in the third quarter of 2009 and 39.3 days in the second quarter of 2010.

On an adjusted1 basis, DCP in the third quarter of 2010 was 53.6 days compared with 53.7 days in the third quarter of 2009 and 53.6 days in the second quarter of 2010.

The company’s debt-to-total capital ratio was 22.7 percent as of September 30, 2010 compared with 26.2 percent as of December 31, 2009 and 23.4 percent as of June 30, 2010.

Interest expense was $8.2 million in the third quarter of 2010 compared with $10.3 million in the third quarter of 2009. The decline was due to the decrease in the company’s total outstanding debt.

CASH FLOW

Operating cash flow was negative $54.3 million in the third quarter of 2010 due to delays in the receipt of approximately $164 million in Medicaid payments. The company received these payments in October 2010.

“If we had received the Medicaid payments during the third quarter of 2010, operating cash flow would have been approximately $109.7 million, or 1.5 times net income plus depreciation and amortization,” 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 2011.

The revenues and expenses associated with the company’s Northeast Operations in the third quarter of 2010 were $50.1 million and $57.8 million, respectively, and they are shown separately in the accompanying Segment Information table.

SHARE REPURCHASE UPDATE

In the third quarter of 2010, Health Net repurchased 722,900 shares for approximately $19.4 million at an average price of $26.82 per share. At September 30, 2010, approximately $208.7 million of authorization under the company’s existing $300 million share repurchase program remained.

“We are pleased that our strong cash position at the parent has supported our ongoing share repurchase efforts,” said Capezza.

2010 GUIDANCE

Health Net is increasing its 2010 annual guidance for GAAP earnings per diluted share to a range of $2.07 to $2.17, or $2.55 to $2.58 per diluted share for the combined Western Region Operations and Government Contracts segments.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s third quarter 2010 results during a conference call on Thursday, November 4, 2010, 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:

             
866.393.1637 (Domestic)           800.642.1687 (Replay – Domestic)
706.643.5711 (International)           706.645.9291 (Replay – International)
             

The access code for the live conference call and replay is 10742408. A replay of the conference call will be available through November 9, 2010. A live webcast and replay of the conference call also will be available at www.healthnet.com under “Investor Relations.” The conference call webcast is open to all interested parties. Anyone listening to the company’s conference call will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2009 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2010 and June 30, 2010, and other reports filed by the company from time to time with the Securities and Exchange Commission.

ABOUT HEALTH NET

Health Net, Inc. is among the nation’s largest publicly traded managed health care companies. Its mission is to help people be healthy, secure and comfortable. The company’s health plans and government contracts subsidiaries provide health benefits to approximately 6.0 million individuals across the country through group, individual, Medicare, Medicaid and TRICARE and Veterans Affairs programs. Health Net’s behavioral health subsidiary, MHN, provides mental health benefits to approximately 5.4 million individuals in all 50 states. The company’s subsidiaries also offer managed health care products related to prescription drugs, and offer managed health care product coordination for multi-region employers and administrative services for medical groups and self-funded benefits programs.

For more information on Health Net, Inc., please visit the company’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

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 subject to a number of risks and uncertainties. These statements are based on management’s analysis, judgment, belief and expectation only as of the date hereof, and are subject to uncertainty and changes in circumstances. Without limiting the foregoing, statements including the words “believes,” “anticipates,” “plans,” “expects,” “may,” “should,” “could,” “estimate,” “intend” and other similar expressions are intended to identify forward-looking statements. Actual results could differ materially due to, among other things, health care reform, including the ultimate impact of the Patient Protection and Affordable Care Act, which could materially adversely affect the company’s financial condition, results of operations and cash flows through, among other things, reduced revenues, new taxes, expanded liability, and increased costs (including medical, administrative, technology or other costs), or require changes to the ways in which the company does business; rising health care costs; continued slow economic growth or a further decline in the economy; negative prior period claims reserve developments; trends in medical care ratios; membership declines; unexpected utilization patterns or unexpectedly severe or widespread illnesses; rate cuts affecting the company’s Medicare or Medicaid businesses; costs, fees and expenses related to the post-closing administrative services provided under the administrative services agreements entered into in connection with the sale of the company’s Northeast business; potential termination of the administrative services agreements by the service recipients should Health Net breach such agreements or fail to perform all or a material part of the services required thereunder; any liabilities of the Northeast business that were incurred prior to the closing of its sale as well as those liabilities incurred through the winding-up and running-out period of the Northeast business; litigation costs; regulatory issues with agencies such as the California Department of Managed Health Care, the Centers for Medicare and Medicaid Services and state departments of insurance; operational issues; 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 Securities and Exchange Commission (“SEC”), and the risks discussed in the company’s other filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. The company undertakes no obligation to publicly revise any of its forward-looking statements to reflect events or circumstances that arise after the date of this release.

The financial information presented in this press release is unaudited and is subject to change as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Form 10-Q for the period ended September 30, 2010.

CONTACT:

Health Net, Inc.
Investor Contact
Angie McCabe
818-676-8692
[email protected]
or
Media Contact
Margita Thompson
818-676-7912
[email protected]

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