Western Region Operations and Government Contracts Segments Produce Combined Net Income of $0.60 Per Diluted Share in Fourth Quarter 2014

Company Updates 2015 GAAP Guidance

Company Website: http://www.healthnet.com
LOS ANGELES -- (Business Wire)

Health Net, Inc. (NYSE: HNT) today announced 2014 fourth quarter GAAP net income of $4.9 million, or $0.06 per diluted share, compared with GAAP net income of $19.8 million, or $0.25 per diluted share, for the fourth quarter of 2013.

For the full year 2014, the company reported GAAP net income of $145.6 million, or $1.80 per diluted share, compared with $170.1 million, or $2.12 per diluted share, for the full year 2013.

In the fourth quarter of 2014, the company incurred $72.1 million of pretax expenses primarily related to its master services agreement with a wholly owned subsidiary of Cognizant Technology Solutions Corporation (Cognizant).

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $47.4 million, or $0.60 per diluted share, in the fourth quarter of 2014 compared with $19.1 million, or $0.24 per diluted share, in the fourth quarter of 2013.

The company’s Western Region and Government Contracts segments produced combined net income of $187.5 million, or $2.32 per diluted share, for the full year 2014, compared with $177.4 million, or $2.21 per diluted share, for the full year 2013.

Highlights from the fourth quarter of 2014 include:

1. Health Net’s total revenues climbed 37.0 percent and health plan services premiums revenues rose 40.1 percent in the fourth quarter of 2014 compared with the fourth quarter of 2013. These revenue increases were driven by ongoing Medicaid and commercial enrollment gains;
2. Medicaid enrollment increased by approximately 559,000 members, or 50.0 percent, as of December 31, 2014 compared with December 31, 2013. This increase was primarily the result of new enrollment in Arizona and California as a result of the expansion of Medicaid eligibility under the Affordable Care Act (ACA);
3. Individual health plan enrollment increased by approximately 217,000 members, or 188.7 percent, as of December 31, 2014 compared with December 31, 2013. The year-over-year growth was driven by the enrollment of new individual members through the ACA exchanges in Arizona and California; and
4. The company’s Western Region commercial Medical Care Ratio (MCR) improved 280 basis points in the fourth quarter of 2014 compared with the fourth quarter of 2013.

“We are pleased that 2014’s strong momentum continued in the fourth quarter of 2014. This profitable revenue growth in 2014, we believe, sets the stage for further gains in 2015,” said Jay Gellert, Health Net’s chief executive officer.

“We look forward to 2015 and the expected implementation of our agreement with Cognizant following receipt of required regulatory approval. We believe this agreement will position Health Net for expanded product development and service capabilities that will support and provide scale for incremental growth in the years ahead,” Gellert explained.

CONSOLIDATED RESULTS

Health Net’s total revenues increased 37.0 percent in the fourth quarter of 2014 to $3.8 billion from $2.7 billion in the fourth quarter of 2013.

Health plan services premium revenues of $3.6 billion in the fourth quarter of 2014 increased by 40.1 percent compared with $2.6 billion in the fourth quarter of 2013.

Health plan services expenses increased by 36.3 percent in the fourth quarter of 2014 to $3.0 billion compared with $2.2 billion in the fourth quarter of 2013.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at December 31, 2014 was approximately 3.2 million members, an increase of 29.1 percent from enrollment at December 31, 2013.

Total enrollment in the company’s California health plans increased 26.0 percent to approximately 2.7 million members at December 31, 2014 compared with enrollment at December 31, 2013.

Western Region commercial enrollment at December 31, 2014 was approximately 1.2 million members, a 9.9 percent increase compared with enrollment at December 31, 2013.

“Our fourth quarter 2014 Medicaid and commercial enrollment was lower than expected. This is because California has been aggressive in redetermining enrollee eligibility for both Medicaid and the commercial exchanges,” explained Gellert. “As a result of this effort, member attrition was higher than expected.”

Membership in tailored network products represented 49.8 percent of the company’s Western Region commercial membership at December 31, 2014 compared with 37.5 percent at December 31, 2013.

“We believe these efficient commercial networks played an important role in our exchange enrollment growth in 2014. We expect they will support our future growth as we believe customers on public and private exchanges will continue to seek affordable networks that provide both quality and access,” said James Woys, Health Net’s chief financial and operating officer and interim treasurer.

“Given these dynamics, we expect the percentage of our commercial enrollment in such tailored network products to rise again in 2015,” Woys noted.

Enrollment in the company’s Medicare Advantage (MA) plans in the Western Region at December 31, 2014 was approximately 275,000 members, an increase of 12.7 percent compared with December 31, 2013.

Medicaid enrollment at December 31, 2014 was approximately 1.7 million members, an increase of 50.0 percent, from December 31, 2013.

“We are seeing growth from both Medicaid expansion and from those eligible for traditional Medicaid,” Woys added.

Dual eligibles enrollment at December 31, 2014 was approximately 16,000 members, an increase of 77.8 percent compared with enrollment of approximately 9,000 at September 30, 2014.

Revenues

Total revenues for the Western Region in the fourth quarter of 2014 were $3.6 billion compared with $2.6 billion in the fourth quarter of 2013.

Net investment income for the Western Region was $11.1 million in the fourth quarter of 2014 compared with $11.6 million in the fourth quarter of 2013 and $11.0 million in the third quarter of 2014.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $3.0 billion in the fourth quarter of 2014 compared with $2.2 billion in the fourth quarter of 2013.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) decreased by 2.5 percent to approximately $379 in the fourth quarter of 2014 compared with approximately $388 in the fourth quarter of 2013.

Commercial health care costs PMPM in the Western Region decreased by 5.6 percent to approximately $321 in the fourth quarter of 2014 compared with approximately $340 in the fourth quarter of 2013.

These premium and health care cost declines were primarily due to the mix shift in the makeup of the commercial membership with significantly higher individual membership in 2014 compared with 2013.

“The underlying commercial health care cost trends remained moderate in the fourth quarter of 2014 with no evidence of flu-related pressure,” noted Woys. “Our guidance assumes some slight upward pressure on commercial health care cost trends in 2015.”

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 84.7 percent in the fourth quarter of 2014 compared with 87.1 percent in the fourth quarter of 2013. The full year 2014 Western Region health plan services MCR was 84.6 percent compared with 85.6 percent for the full year 2013.

The Western Region commercial MCR was 84.6 percent in the fourth quarter of 2014 compared with 87.4 percent in the fourth quarter of 2013 and 83.9 percent in the third quarter of 2014. The full year 2014 Western Region commercial MCR was 83.0 percent compared with 85.6 percent for the full year 2013.

“We are very pleased that we were able to produce both significant year-over-year enrollment gains and MCR improvement. We believe the MCR improvement is due to better performance in our group accounts that allowed us to cover the expense of the health insurer fee, and a higher percentage of our commercial enrollment coming from the individual segment due to the substantial growth from the individual exchanges,” Woys commented.

The Medicaid MCR was 80.0 percent in the fourth quarter of 2014 compared with 82.7 percent in the fourth quarter of 2013. The full year 2014 Medicaid MCR in the Western Region was 82.1 percent compared with 80.4 percent for the full year 2013.

“The fourth quarter 2014 Medicaid MCR was impacted by a number of year-end adjustments related to the significant enrollment increases from new populations and other factors. Accordingly, we believe the full year Medicaid MCR of 82.7 percent is a better reflection of our actual experience,” Woys noted.

The MA MCR was 92.8 percent in the fourth quarter of 2014 compared with 90.5 percent in the fourth quarter of 2013. The full year 2014 MA MCR in the Western Region was 91.5 percent compared with 90.6 percent for the full year 2013.

“The Medicare MCR was adversely affected by higher fourth quarter 2014 utilization from MA members who changed health plans at year-end and from the impact of an earlier than expected flu season,” explained Woys.

General and Administrative (G&A) Expenses

G&A expense in the Western Region was $404.7 million in the fourth quarter of 2014 compared with $280.4 million in the fourth quarter of 2013. The $124.5 million increase in the Western Region G&A expense year-over-year was driven by a $92.1 million increase in premium taxes, health insurer fee and other ACA-related fees. The G&A expense ratio in the Western Region was 11.3 percent in the fourth quarter of 2014 compared with 10.9 percent in the fourth quarter of 2013. The 40 basis point increase in the Western Region G&A expense ratio year-over-year was driven by a 220 basis point increase in premium taxes, health insurer fee and other ACA-related fees, partially offset by a 180 basis point decline in the Western Region administrative expense ratio, which does not include premium taxes, health insurer fee and other ACA-related fees.

“We are pleased that our ongoing efficiency efforts and our rapid growth helped drive the administrative expense ratio lower,” Woys commented.

The Western Region G&A expense ratio for the full year 2014 was 10.9 percent compared with 10.3 percent for the full year 2013.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the fourth quarter of 2014 were $159.6 million compared with $148.5 million in the fourth quarter of 2013.

Government Contracts expenses in the fourth quarter of 2014 were $147.2 million compared with $124.6 million in the fourth quarter of 2013.

“Our Government Contracts performance for the fourth quarter of 2014 was affected by lower TRICARE earnings and startup costs related to the expansion of our work for the VA,” Woys explained.

BALANCE SHEET

Cash and investments as of December 31, 2014 were $2.7 billion compared with $2.1 billion as of December 31, 2013.

The company noted that the net receivable balance for commercial reinsurance, risk corridors and risk adjusters related to the ACA was approximately $248 million at December 31, 2014. Approximately 94 percent of this net receivable is related to reinsurance.

Reserves for claims and other settlements as of December 31, 2014 were $1.9 billion compared with $984.1 million as of December 31, 2013 and $1.7 billion as of September 30, 2014.

Days claims payable (DCP) for the fourth quarter of 2014 was 57.4 days compared with 40.6 days in the fourth quarter of 2013 and 51.4 days in the third quarter of 2014.

On an adjusted¹ basis, DCP in the fourth quarter of 2014 was 70.1 days compared with 57.9 days in the fourth quarter of 2013 and 65.3 days in the third quarter of 2014.

“The 4.8 day increase in adjusted DCP sequentially in the fourth quarter of 2014 reflects the continued impact of reinsurance on health care costs and higher reserves as a consequence of our rapid enrollment growth,” Woys noted.

The company’s debt-to-total capital ratio was 22.6 percent as of December 31, 2014 compared with 23.5 percent as of December 31, 2013 and 22.1 percent as of September 30, 2014.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $109.7 million in the fourth quarter of 2014. For the full year 2014, operating cash flow was positive $776.0 million.

“The full year operating cash flow improvement was driven primarily by our strong operating results and our business growth,” explained Woys. “Operating cash flow in the fourth quarter of 2014, however, was negatively impacted by the timing of payments related to state health programs.”

The company noted that a late Medicaid payment from the state of California of approximately $311 million was received in January 2015.

Cash at the parent was approximately $61 million at December 31, 2014.

SHARE REPURCHASE UPDATE

For the full year 2014, Health Net repurchased approximately 3 million shares of its common stock for $137.8 million at an average price of $45.92 per share. On December 16, 2014, Health Net’s board of directors approved a $258 million increase to the company’s existing share repurchase program. Including this increase, Health Net had $400 million in repurchase authority under the company’s existing share repurchase program as of December 31, 2014.

Health Net continued its share repurchases in the first quarter of 2015. The company repurchased 1.1 million shares from January 1, 2015 through January 31, 2015, at a total cost of $57.7 million.

The company noted it funded its January share repurchases from its revolving credit facility.

2015 GUIDANCE

The company expects GAAP earnings per diluted share of at least $2.70 for the full year 2015. The table included in this release provides specific metrics.

“Our 2015 GAAP earnings per diluted share guidance of at least $2.70 is based primarily on our expectation of an approximately 9 percent increase in membership and an approximately 23 percent increase in total revenues; stable MCRs in the commercial, Medicare and Medicaid lines of business; and an approximately 50 basis point decline in the company’s administrative expense ratio in 2015 compared with 2014 results,” said Gellert.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2014 earnings results during a conference call on Tuesday, February 10, 2015, 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:

An access code is not required for the live conference call on February 10, 2015. The access code for the replay is 13599556. The replay of the conference call will be available through February 15, 2015. 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 Reports on Form 10-Q for the quarterly periods ended March 31, 2014, June 30, 2014, and September 30, 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 6.0 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 Health Net’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 involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of the company’s 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; the company’s ability to reduce administrative expenses while maintaining targeted levels of service and operating performance, including through the company’s master services agreement with a subsidiary of Cognizant Technology Solutions Corporation (Cognizant); whether the company receives required regulatory approvals for Cognizant’s provision of services to the company and any conditions imposed in order to obtain such regulatory approvals; the company’s ability to recognize the intended cost savings and other intended benefits of the Cognizant transaction; 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; trends in medical care ratios; membership declines or negative changes in the company’s 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 and Department of Health Care Services, 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 the company’s 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, including as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Annual Report on Form 10-K for the year ended December 31, 2014.

¹ See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.