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HEALTH NET INC
Symbol U : HNT
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Health Net Reports Fourth Quarter 2012 GAAP Net Income of $5.1 Million, or $0.06 Per Diluted Share

2013-01-30 08:15 ET - News Release

Western Region Operations and Government Contracts Segments Produce Combined Net Earnings of $0.36 Per Diluted Share in Fourth Quarter 2012


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

Health Net, Inc. (NYSE: HNT) today announced 2012 fourth quarter GAAP net income of $5.1 million, or $0.06 per diluted share, compared with GAAP net income of $60.2 million, or $0.71 per diluted share, for the fourth quarter of 2011.

The 2011 and 2012 financial results included in this release and the attached financial tables reflect the treatment of the company’s Medicare stand-alone Part D (Medicare PDP) business that was sold on April 1, 2012 as discontinued operations.

The fourth quarter 2012 GAAP results include $20.3 million in Corporate/Other pretax expenses, primarily driven by:

  1. approximately $5.0 million related to the early termination of a medical management contract and approximately $5.2 million for severance expenses; and
  2. approximately $7.1 million in litigation-related expenses.

The company also incurred a $13.8 million pretax loss in the company’s Divested Operations and Services segment, resulting primarily from a lease impairment related to the company’s divested Northeast business.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $29.8 million, or $0.36 per diluted share, in the fourth quarter of 2012 compared with $60.6 million, or $0.72 per diluted share, in the fourth quarter of 2011.

For the full year 2012, Health Net reported GAAP net income of approximately $121.2 million, or $1.46 per diluted share, compared with $72.1 million, or $0.80 per diluted share, for the full year 2011.

The company’s Western Region and Government Contracts segments produced combined net income of $85.1 million, or $1.02 per diluted share, for the full year 2012, and approximately $278.7 million, or $3.09 per diluted share, for the full year 2011.

“While the first half of 2012 presented us with challenges, our performance in the second half of 2012 demonstrated stability as we continued to prepare for 2013 and 2014,” said Jay Gellert, Health Net’s chief executive officer.

“We are reiterating our 2013 earnings per diluted share guidance of $2.00 to $2.10,” commented Gellert. “This guidance includes approximately $30 million of operating expenses in preparation for health care reform implementation but excludes any costs related to the company’s expected participation in the state of California’s duals demonstration.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 4.4 percent in the fourth quarter of 2012 to $2.8 billion from $2.7 billion in the fourth quarter of 2011.

Health plan services premium revenues increased by 5.3 percent in the fourth quarter of 2012 to $2.6 billion compared with approximately $2.5 billion in the fourth quarter of 2011.

Health plan services expenses increased by approximately 8.0 percent in the fourth quarter of 2012 to $2.3 billion compared with $2.1 billion in the fourth quarter of 2011.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at December 31, 2012 was approximately 2.6 million members, a decrease of approximately 1.1 percent from enrollment at December 31, 2011.

Total enrollment in the company’s California health plans decreased 1.3 percent from December 31, 2011 to December 31, 2012.

Western Region commercial enrollment at December 31, 2012 was 1.2 million members, a 9.7 percent decrease compared with enrollment at December 31, 2011.

“Membership in our commercial tailored network products continues to grow. We ended the year with approximately 432,000 members in our tailored network products, representing 35 percent of our Western Region commercial membership,” said Jim Woys, chief operating officer of Health Net. “We believe these cost-effective products will play a critical role as health care reform is implemented.”

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2012 was 234,000 members, an increase of 14.1 percent compared with December 31, 2011.

Medicaid enrollment in California at December 31, 2012 was approximately 1.1 million members, an increase of 75,000 members, or 7.4 percent, from December 31, 2011. This increase was due to both enrollment gains in Medicaid membership and approximately 34,000 new members from the seniors and persons with disabilities (SPD) population.

Revenues

Total revenues for the Western Region in the fourth quarter of 2012 were $2.6 billion compared with $2.5 billion in the fourth quarter of 2011.

Net investment income for the Western Region was approximately $19.1 million in the fourth quarter of 2012 compared with $10.0 million in the fourth quarter of 2011 and approximately $16.4 million in the third quarter of 2012.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.3 billion in the fourth quarter of 2012 compared with approximately $2.2 billion in the fourth quarter of 2011.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.3 percent to approximately $376 in the fourth quarter of 2012 compared with $360 in the fourth quarter of 2011.

Commercial health care costs PMPM in the Western Region increased by 7.5 percent to approximately $328 in the fourth quarter of 2012 compared with approximately $306 in the fourth quarter of 2011.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 88.1 percent in the fourth quarter of 2012 compared with 86.3 percent in the fourth quarter of 2011. The full year 2012 Western Region health plan services MCR was 89.1 percent compared with 86.5 percent for the full year 2011.

The Western Region commercial MCR was 87.4 percent in the fourth quarter of 2012 compared with 84.8 percent in the fourth quarter of 2011 and 86.7 percent in the third quarter of 2012. The full year 2012 Western Region commercial MCR was 88.6 percent compared with 85.3 percent for the full year 2011.

“The commercial MCR increased 70 basis points sequentially in the fourth quarter of 2012, primarily due to two factors. First, utilization increased among members in large group accounts that terminated on December 31, 2012. This was expected as part of the repositioning of the commercial book,” said Woys. “Also, risk-sharing adjustments with certain providers impacted the commercial MCR. These risk-sharing factors are a result of better than expected performance in our tailored network products throughout 2012.”

The Medicare Advantage (MA) MCR in the Western Region was 88.6 percent in the fourth quarter of 2012 compared with 90.5 percent in the fourth quarter of 2011. The full year 2012 MA MCR in the Western Region was 89.6 percent compared with 90.3 percent for the full year 2011.

G&A Expense

G&A expense in the Western Region was $235.2 million in the fourth quarter of 2012 compared with $222.1 million in the fourth quarter of 2011. The G&A expense ratio was 8.9 percent in the fourth quarter of 2012 compared with 8.9 percent in the fourth quarter of 2011 and 8.5 percent in the third quarter of 2012.

“The sequential increase in G&A expenses was primarily due to increased marketing costs, consistent with our expectations,” commented Woys.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the fourth quarter of 2012 were $159.6 million compared with $194.6 million in the fourth quarter of 2011.

Government Contracts expenses in the fourth quarter of 2012 were approximately $136.6 million compared with $155.6 million in the fourth quarter of 2011.

The decrease in revenues and expenses was primarily due to the new Military and Family Life Counseling contract that was effective in the fourth quarter of 2012.

BALANCE SHEET

Cash and investments as of December 31, 2012 were approximately $2.2 billion compared with approximately $1.8 billion as of December 31, 2011.

Reserves for claims and other settlements as of December 31, 2012 were $1.0 billion compared with $912.1 million as of December 31, 2011 and $1.0 billion as of September 30, 2012.

Days claims payable (DCP) for the fourth quarter of 2012 was 40.7 days compared with 39.0 days in the fourth quarter of 2011 and 41.6 days in the third quarter of 2012.

On an adjusted1 basis, DCP in the fourth quarter of 2012 was 58.2 days compared with 54.1 days in the fourth quarter of 2011 and 57.7 days in the third quarter of 2012.

The company’s debt-to-total capital ratio was 24.3 percent as of December 31, 2012 compared with 26.2 percent as of December 31, 2011 and 24.4 percent as of September 30, 2012.

CASH FLOW FROM OPERATIONS

Operating cash flow was approximately $33.4 million in the fourth quarter of 2012. For the full year 2012, operating cash flow was $32.5 million.

“Operating cash flow in the quarter was greater than net income plus depreciation and amortization,” said Joseph Capezza, Health Net’s chief financial officer. “Full year 2012 operating cash flow would have been greater than net income plus depreciation and amortization if we excluded the impact of the sale of our Medicare PDP business. The cash benefit of the transaction is reflected in Cash Flows from Investing Activities on the Statement of Cash Flows.

“We expect full year 2013 operating cash flow to be at least equal to our expectations for net income plus depreciation and amortization,” said Capezza. “Cash at the parent at December 31, 2012 was approximately $106 million.”

DIVESTED OPERATIONS AND SERVICES SEGMENT

The company’s Divested Operations and Services segment includes items related to the run-out of the Northeast business and transition-related revenues and expenses related to the Medicare PDP business that was sold on April 1, 2012. Health Net continues to provide run-out support services for the Northeast business pursuant to claims servicing agreements in place with UnitedHealthcare and its affiliates.

SHARE REPURCHASE UPDATE

For the full year 2012, Health Net repurchased approximately 2.1 million shares of its common stock for approximately $50.0 million at an average price of $24.05 per share. At December 31, 2012, approximately $350 million of authorization under the company’s existing $400 million share repurchase program remained.

2013 GUIDANCE

The following table has specific 2013 guidance metrics. This guidance includes the impact of approximately $30 million of operating expenses related to the implementation of health care reform, but excludes any impact from the company’s expected participation in the state of California’s duals demonstration.

Metric

         

2013 Guidance

Year-end membership(a)(c)

         

Commercial: -8% to -9%

Medicaid: +4% to +6%

Medicare Advantage: +1% to +2%

Total health plan membership: -1% to -2%

Consolidated revenues(b)

         

~$10.7 billion to $11.2 billion

Commercial premium yields PMPM(a)(c)

         

~ +3.6%

Commercial health care costs PMPM(a)(c)

         

~350 basis points < premium yields PMPM

Selling cost ratio(a)

 

G&A expense ratio(a)

         

~2.3% to 2.4%

 

~9.0% to 9.4%

Tax rate(b)

         

38.0% to 39.0%

Weighted-average fully
diluted shares outstanding

         

 

~80 million

Earnings per share

         

$2.00 to $2.10

(a)   For the company’s Western Region Operations segment
(b) For the combined Western Region Operations and Government Contracts segments
(c) These estimates are in comparison to reported 2012 amounts.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2012 earnings results during a conference call on Wednesday, January 30, 2013, 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 toll-free)         (855) 859-2056 (Replay – Domestic toll-free)
(706) 643-5711 (International) (404) 537-3406 (Replay – International)

The access code for the live conference call and replay is 89643769. A replay of the conference call will be available through February 4, 2013. 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, 2011, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and September 30, 2012, 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 5.4 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid, 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 Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

Health Net, Inc. 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 regulation of health benefits and managed care operations, including the ultimate impact of the Affordable Care Act, which could materially adversely affect Health Net’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 Health Net 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 and other risks and uncertainties affecting Health Net’s Medicare or Medicaid businesses; Health Net’s ability to successfully participate in the dual-eligibles pilot programs; 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; failure to effectively oversee our third-party vendors; noncompliance by Health Net or Health Net’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; liabilities incurred in connection with Health Net’s divested operations; impairment of Health Net’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 Health Net’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 Health Net’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, Health Net 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, 2012.

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.

           
Health Net, Inc.
Enrollment Data - By State
(In thousands)
  Change from
September 30, 2012   December 31, 2011
December 31,September 30,December 31,Increase/%Increase/%
2012   2012   2011   (Decrease)   Change   (Decrease)   Change
California
Large Group 696 714 826 (18 ) (2.5 )% (130 ) (15.7 )%
Small Group and Individual 313   307   308   6     2.0 %   5     1.6 %
Commercial Risk 1,009 1,021 1,134 (12 ) (1.2 )% (125 ) (11.0 )%
Medicare Advantage 145 143 125 2 1.4 % 20 16.0 %
Medi-Cal   1,084   1,069   1,009   15     1.4 %   75     7.4 %
Total California   2,238   2,233   2,268   5     0.2 %   (30 )   (1.3 )%
 
Arizona
Large Group 82 84 77 (2 ) (2.4 )% 5 6.5 %
Small Group and Individual 59   59   63   0     0.0 %   (4 )   (6.3 )%
Commercial Risk 141   143   140   (2 )   (1.4 )%   1     0.7 %
Medicare Advantage   43   43   41   0     0.0 %   2     4.9 %
Total Arizona   184   186   181   (2 )   (1.1 )%   3     1.7 %
 
Oregon
Large Group 26 30 50 (4 ) (13.3 )% (24 ) (48.0 )%
Small Group and Individual 57   58   42   (1 )   (1.7 )%   15     35.7 %
Commercial Risk 83 88 92 (5 ) (5.7 )% (9 ) (9.8 )%
Medicare Advantage   46   45   39   1     2.2 %   7     17.9 %
Total Oregon   129   133   131   (4 )   (3.0 )%   (2 )   (1.5 )%
 
                                 
Total Health Plan Enrollment
Large Group 804 828 953 (24 ) (2.9 )% (149 ) (15.6 )%
Small Group and Individual 429   424   413   5     1.2 %   16     3.9 %
Commercial Risk 1,233 1,252 1,366 (19 ) (1.5 )% (133 ) (9.7 )%
Medicare Advantage 234 231 205 3 1.3 % 29 14.1 %
Medi-Cal/Medicaid 1,084   1,069   1,009   15     1.4 %   75     7.4 %
Western Region Operations 2,551 2,552 2,580 (1 ) 0.0 % (29 ) (1.1 )%
 
Medicare PDP (stand-alone) 0 0 382 0 0.0 % (382 ) (100.0 )%
                         
Total     2,551   2,552   2,962   (1 )   0.0 %   (411 )   (13.9 )%
 
 
TRICARE - North Contract Eligibles 2,883   2,884   3,004   (1 )   0.0 %   (121 )   (4.0 )%
 
 
           
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
  Change from
September 30, 2012   December 31, 2011
December 31,September 30,December 31,Increase/%Increase/%
2012   2012   2011   (Decrease)   Change   (Decrease)   Change
 
Large Group
California 696 714 826 (18 ) (2.5 )% (130 ) (15.7 )%
Arizona 82 84 77 (2 ) (2.4 )% 5 6.5 %
Oregon 26   30   50   (4 )   (13.3 )%   (24 )   (48.0 )%
804   828   953   (24 )   (2.9 )%   (149 )   (15.6 )%
 
Small Group and Individual
California 313 307 308 6 2.0 % 5 1.6 %
Arizona 59 59 63 0 0.0 % (4 ) (6.3 )%
Oregon 57   58   42   (1 )   (1.7 )%   15     35.7 %
429   424   413   5     1.2 %   16     3.9 %
 
Commercial Risk
California 1,009 1,021 1,134 (12 ) (1.2 )% (125 ) (11.0 )%
Arizona 141 143 140 (2 ) (1.4 )% 1 0.7 %
Oregon 83   88   92   (5 )   (5.7 )%   (9 )   (9.8 )%
1,233   1,252   1,366   (19 )   (1.5 )%   (133 )   (9.7 )%
 
Medicare Advantage
California 145 143 125 2 1.4 % 20 16.0 %
Arizona 43 43 41 0 0.0 % 2 4.9 %
Oregon 46   45   39   1     2.2 %   7     17.9 %
234 231 205 3 1.3 % 29 14.1 %
 
Medi-Cal/Medicaid
California 1,084 1,069 1,009 15 1.4 % 75 7.4 %
 
                                 
Total Health Plan Enrollment
Large Group 804 828 953 (24 ) (2.9 )% (149 ) (15.6 )%
Small Group and Individual 429   424   413   5     1.2 %   16     3.9 %
Commercial Risk 1,233 1,252 1,366 (19 ) (1.5 )% (133 ) (9.7 )%
Medicare Advantage 234 231 205 3 1.3 % 29 14.1 %
Medi-Cal/Medicaid 1,084   1,069   1,009   15     1.4 %   75     7.4 %
Western Region Operations 2,551 2,552 2,580 (1 ) 0.0 % (29 ) (1.1 )%
 
Medicare PDP (stand-alone) 0 0 382 0 0.0 % (382 ) (100.0 )%
                         
Total     2,551   2,552   2,962   (1 )   0.0 %   (411 )   (13.9 )%
 
 
TRICARE - North Contract Eligibles 2,883   2,884   3,004   (1 )   0.0 %   (121 )   (4.0 )%
 
 
 
Health Net, Inc.
Consolidated Statements of Operations
($ in thousands, except per share data)
             
Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
REVENUES:   2012     2012     2011   2012     2011  
Health plan services premiums $ 2,631,645 $ 2,578,689 $ 2,498,736 10,450,210 $ 9,878,687
Government contracts 159,604 169,811 194,632 687,025 1,416,619
Net investment income 19,078 16,355 10,047 82,434 74,161
Administrative services fees and other income 1,668 1,854 4,549 17,968 11,523
Divested operations and services revenue   14,803     12,863     -   40,471     34,446  
Total revenues   2,826,798     2,779,572     2,707,964   11,278,108     11,415,436  
 
EXPENSES:
Health plan services 2,322,282 2,281,388 2,149,873 9,305,784 8,539,754
Government contracts 135,649 151,815 157,020 603,180 1,237,884
General and administrative 251,483 222,425 230,375 939,940 1,052,458
Selling 64,921 61,053 61,615 245,925 237,562
Depreciation and amortization 8,424 7,907 7,086 31,146 31,152
Interest 8,325 8,021 8,499 33,220 32,131
Divested operations and services expense 28,644 17,587 29,988 88,617 163,546
Adjustment to loss on sale of Northeast subsidiaries   -     -     7   -     (40,815 )
Total expenses   2,819,728     2,750,196     2,644,463   11,247,812     11,253,672  
Income from continuing operations before income taxes 7,070 29,376 63,501 30,296 161,764
Income tax (benefit) provision   (228 )   8,898     20,440   5,484     100,708  
Income from continuing operations   7,298     20,478     43,061   24,812     61,056  
 
Discontinued operation:
Income (loss) from discontinued operation, net of tax - - 17,142 (18,452 ) 11,064
(Loss) gain on sale of discontinued operation, net of tax   (2,156 )   (2,450 )   -   114,834     -  
(Loss) gain on discontinued operation, net of tax   (2,156 )   (2,450 )   17,142   96,382     11,064  
 
Net income $ 5,142   $ 18,028   $ 60,203 $ 121,194   $ 72,120  
 
Net income per share-basic:
Income from continuing operations $ 0.09 $ 0.25 $ 0.52 $ 0.30 $ 0.69
(Loss) gain on discontinued operation, net of tax   (0.03 )   (0.03 )   0.21   1.18     0.12  
Net income per share-basic $ 0.06   $ 0.22   $ 0.73 $ 1.48   $ 0.81  
 
Net income per share-diluted:
Income from continuing operations $ 0.09 $ 0.25 $ 0.51 $ 0.30 $ 0.68
(Loss) gain on discontinued operation, net of tax   (0.03 )   (0.03 )   0.20   1.16     0.12  
Net income per share-diluted $ 0.06   $ 0.22   $ 0.71 $ 1.46   $ 0.80  
 
Weighted average shares outstanding:
Basic 81,282 81,607 82,721 82,158 88,524
Diluted 82,111 82,039 84,247 83,112 89,970
 
 
 
Health Net, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except ratio data)
         
December 31, September 30, December 31,
  2012     2012     2011  
ASSETS
Current Assets
Cash and cash equivalents $ 340,110 $ 312,579 $ 230,253
Investments - available for sale 1,812,512 1,671,678 1,557,997
Premiums receivable, net 364,386 310,804 251,911
Amounts receivable under government contracts 224,895 206,560 234,740
Other receivables 113,875 244,924 225,004
Deferred taxes 48,380 40,647 46,659
Other assets   128,195     151,042     117,876  
Total current assets 3,032,353 2,938,234 2,664,440
Property and equipment, net 183,793 174,932 145,302
Goodwill 565,886 565,886 605,886
Other intangible assets, net 17,271 18,128 20,699
Deferred taxes 16,435 5,737 49,685
Investments-available for sale-noncurrent - - 2,147
Other noncurrent assets   101,743     107,386     119,510  
Total Assets $ 3,917,481   $ 3,810,303   $ 3,607,669  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 1,027,444 $ 1,032,248 $ 912,126
Health care and other costs payable under government contracts 75,649 58,410 88,440
Unearned premiums 151,052 128,194 176,733
Accounts payable and other liabilities   373,428     325,636     240,281  
Total current liabilities 1,627,573 1,544,488 1,417,580
Senior notes payable 399,095 399,044 398,890
Borrowings under revolving credit facility 100,000 100,000 112,500
Other noncurrent liabilities   236,949     220,489     235,553  
Total Liabilities   2,363,617     2,264,021     2,164,523  
 
Stockholders' Equity
Common stock 149 149 147
Additional paid-in capital 1,329,000 1,323,150 1,278,037
Treasury common stock, at cost (2,092,625 ) (2,092,459 ) (2,023,129 )
Retained earnings 2,292,653 2,287,511 2,171,459
Accumulated other comprehensive income   24,687     27,931     16,632  
Total Stockholders' Equity   1,553,864     1,546,282     1,443,146  
Total Liabilities and Stockholders' Equity $ 3,917,481   $ 3,810,303   $ 3,607,669  
 
Debt-to-Total Capital Ratio 24.3 % 24.4 % 26.2 %
 
 
 
Health Net, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
             
Quarter Ended Quarter Ended Quarter Ended Year Ended Year Ended
December 31, September 30, December 31, December 31, December 31,
  2012     2012     2011     2012     2011  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,142 $ 18,028 $ 60,203 $ 121,194 $ 72,120

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Amortization and depreciation 8,424 7,907 7,086 31,146 31,152
Share-based compensation expense 5,480 5,346 6,257 28,893 27,602
Deferred income taxes (18,402 ) 15,430 22,171 6,481 7,771

Excess tax benefits from share-based compensation

(30

)

-

(70

)

(6,089

)

(1,349

)

Gain on sale of discontinued operation 2,156 2,450 - (114,834 ) -
Adjustment to loss on sale of business - - 7 - (40,815 )
Net realized gain on sale on investments (7,019 ) (4,272 ) (709 ) (36,680 ) (33,029 )
Other changes 8,326 (215 ) 10,863 15,158 22,542
Changes in assets and liabilities:
Premiums receivable and unearned premiums (30,724 ) (200,559 ) (240,347 ) (204,111 ) 65,221
Other current assets, receivables and noncurrent assets 52,622 (25,847 ) 16,437 (25,581 ) (54,031 )
Amounts receivable/payable under government contracts (8,786 ) 23,972 6,301 (5,568 ) 32,754
Reserves for claims and other settlements (4,804 ) 21,755 39,089 153,777 (29,898 )
Accounts payable and other liabilities   20,989     11,238     (47,105 )   68,754     3,340  
Net cash provided by (used in) operating activities   33,374     (124,767 )   (119,817 )   32,540     103,380  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 217,167 117,584 128,299 1,350,003 1,760,336
Maturities of investments 37,579 28,715 40,941 135,394 189,137
Purchases of investments (395,355 ) (272,614 ) (71,782 ) (1,678,582 ) (1,814,431 )
Proceeds from sale of property and equipment 24 - - 24 -
Purchases of property and equipment (18,071 ) (17,370 ) (32,124 ) (73,101 ) (64,260 )
Net cash received for sale of businesses - - - 248,238 -

Purchase price adjustment on sale of Northeast health plans

- - 80,000 - 162,101
Sales and purchases of restricted investments and other   (558 )   (871 )   (1,009 )   5,466     (10,656 )
Net cash (used in) provided by investing activities   (159,214 )   (144,556 )   144,325     (12,558 )   222,227  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 352 - 1,047 16,941 13,356
Repurchases of common stock (166 ) (40,536 ) (76,410 ) (69,496 ) (389,850 )
Excess tax benefits from share-based compensation 30 - 70 6,089 1,349
Borrowings under financing arrangements - 10,000 281,000 110,000 978,500
Repayment of borrowings under financing arrangements - - (319,712 ) (122,500 ) (872,212 )
Net (decrease) increase in checks outstanding, net of deposits 23,808 34 (5,901 ) 23,842 (46,718 )
Customer funds administered   129,347     (20,740 )   (50,685 )   124,999     (129,917 )
Net cash provided by (used in) financing activities   153,371     (51,242 )   (170,591 )   89,875     (445,492 )
 
Net increase (decrease) in cash and cash equivalents 27,531 (320,565 ) (146,083 ) 109,857 (119,885 )
Cash and cash equivalents, beginning of period   312,579     633,144     376,336     230,253     350,138  
Cash and cash equivalents, end of period $ 340,110   $ 312,579   $ 230,253   $ 340,110   $ 230,253  
 
 
 
Health Net, Inc.
SEGMENT INFORMATION (page 1)
($ in thousands, except per share and PMPM data)
                                   

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

 
Quarter Ended December 31, 2012 Quarter Ended September 30, 2012 Quarter Ended December 31, 2011
Divested Divested Divested
Western Region Government Operations Corporate/ Western Region Government Operations Corporate/ Western Region Government Operations Corporate/

Operations1

 

Contracts2

 

and Services3

 

Other5,7

  Consolidated Operations1   Contracts2  

and Services3

 

Other5

  Consolidated Operations1   Contracts6   and Services3  

Other4,5

  Consolidated
 
Health plan services premiums $ 2,631,645 $ 2,631,645 $ 2,578,689 $ 2,578,689 $ 2,498,736 $ 2,498,736
Government contracts $ 159,604 159,604 $ 169,811 169,811 194,632 194,632
Net investment income 19,078 19,078 16,355 16,355 10,047 10,047
Administrative services fees and other income 1,668 1,668 1,843 11 1,854 4,549 4,549
Divested operations and services revenue         $ 14,803           14,803           $ 12,863           12,863           0           -
Total revenues 2,652,391 159,604 14,803 - 2,826,798 2,596,887 169,811 12,874 - 2,779,572 2,513,332 194,632 - - 2,707,964
Health plan services 2,317,262 5,020 2,322,282 2,281,354 34 2,281,388 2,156,223 (25 ) (6,325 ) 2,149,873
Government contracts 136,584 (935 ) 135,649 148,705 3,110 151,815 155,580 1,440 157,020
G&A excluding insurance, taxes and fees 220,116 (304 ) 16,236 236,048 201,845 (332 ) 4,115 205,628 201,918 (450 ) 8,231 209,699
Insurance, taxes and fees   15,133           302           15,435     16,555           242           16,797   20,219           457       -       20,676
G&A including insurance, taxes and fees 235,249 (2 ) 16,236 251,483 218,400 (90 ) 4,115 222,425 222,137 7 8,231 230,375
Selling 64,921 64,921 61,053 61,053 61,609 6 61,615
Depreciation and amortization 8,424 8,424 7,907 7,907 7,086 7,086
Interest 8,325 8,325 8,021 8,021 8,499 8,499
Divested operations and services expense 28,644 28,644 17,587 17,587 29,988 29,988
Adjustment to loss on sale of Northeast health plans                   -                     -           7           7
Total expenses   2,634,181       136,584     28,642       20,321       2,819,728     2,576,735       148,705     17,531       7,225       2,750,196   2,455,554       155,580     29,983       3,346       2,644,463
Income (loss) from operations before income taxes 18,210 23,020 (13,839 ) (20,321 ) 7,070 20,152 21,106 (4,657 ) (7,225 ) 29,376 57,778 39,052 (29,983 ) (3,346 ) 63,501
Income tax (benefit) provision   2,142       9,246     (5,615 )     (6,001 )     (228 )   1,640       8,372     (1,946 )     832       8,898   20,417       15,853     (13,125 )     (2,705 )     20,440
Income (loss) from continuing operations $ 16,068     $ 13,774   $ (8,224 )   $ (14,320 )   $ 7,298   $ 18,512     $ 12,734   $ (2,711 )   $ (8,057 )   $ 20,478 $ 37,361     $ 23,199   $ (16,858 )   $ (641 )   $ 43,061
 
Basic earnings (loss) per share from continuing operations $ 0.20 $ 0.17 $ (0.10 ) $ (0.18 ) $ 0.09 $ 0.23 $ 0.16 $ (0.03 ) $ (0.10 ) $ 0.25 $ 0.45 $ 0.28 $ (0.20 ) $ (0.01 ) $ 0.52
Diluted earnings (loss) per share from continuing operations $ 0.19 $ 0.17 $ (0.10 ) $ (0.18 ) $ 0.09 $ 0.23 $ 0.15 $ (0.03 ) $ (0.10 ) $ 0.25 $ 0.44 $ 0.28 $ (0.20 ) $ (0.01 ) $ 0.51
 
Basic weighted average shares outstanding 81,282 81,282 81,282 81,282 81,282 81,607 81,607 81,607 81,607 81,607 82,721 82,721 82,721 82,721 82,721
Diluted weighted average shares outstanding 82,111 82,111 81,282 81,282 82,111 82,039 82,039 81,607 81,607 82,039 84,247 84,247 82,721 82,721 84,247
 
Pretax margin 0.69 % 0.78 % 2.3 %
Commercial premium yield 4.3 % 4.7 % 4.7 %
Commercial premium PMPM $ 375.65 $ 376.89 $ 360.12
Commercial health care cost trend 7.5 % 7.1 % 3.9 %
Commercial health care cost PMPM $ 328.44 $ 326.60 $ 305.52
Commercial MCR 87.4 % 86.7 % 84.8 %
Medicare Advantage MCR 88.6 % 90.1 % 90.5 %
Medicaid MCR 88.9 % 91.6 % 85.5 %
Health plan services MCR 88.1 % 88.5 % 86.3 %
G&A expense ratio 8.9 % 8.5 % 8.9 %
Selling costs ratio 2.5 % 2.4 % 2.5 %
 
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 items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.
 
4 Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits.
 
5 Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.
 
6

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. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 
7 Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.
 
 
 
Health Net, Inc.
SEGMENT INFORMATION (page 2)
($ in thousands, except per share and PMPM data)
                         

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

 
Year Ended December 31, 2012 Year Ended December 31, 2011
Divested Divested
Western Region Government Operations Corporate/ Western Region Government Operations Corporate/
Operations1   Contracts2   and Services3  

Other4,5,6

  Consolidated   Operations1   Contracts2   and Services3  

Other4,5

  Consolidated
 
Health plan services premiums $ 10,450,210 $ - $ 10,450,210 $ 9,876,343 $ 2,344 $ 9,878,687
Government contracts 687,025 687,025 1,416,619 1,416,619
Net investment income 82,434 82,434 74,092 69 74,161
Administrative services fees and other income 17,957 11 17,968 11,523 11,523
Divested operations and services revenue           40,471           40,471           34,446           34,446  
Total revenues 10,550,601 687,025 40,482 - 11,278,108 9,961,958 1,416,619 36,859 - 11,415,436
Health plan services 9,306,393 174 (783 ) 9,305,784 8,545,623 930 (6,799 ) 8,539,754
Government contracts 597,317 5,863 603,180 1,231,388 6,496 1,237,884
G&A excluding insurance, taxes and fees 828,648 (1,445 ) 36,892 864,095 768,314 559 199,732 968,605
Insurance, taxes and fees   74,494           1,351           75,845   82,698           1,155           83,853  
G&A including insurance, taxes and fees 903,142 (94 ) 36,892 939,940 851,012 1,714 199,732 1,052,458
Selling 245,925 245,925 237,360 202 237,562
Depreciation and amortization 31,145 1 31,146 31,140 12 31,152
Interest 33,220 33,220 31,946 185 32,131
Divested operations and services expense 88,617 88,617 163,546 163,546
Adjustment to loss on sale of Northeast health plans                   -           (40,815 )         (40,815 )
Total expenses   10,519,825       597,317     88,698       41,972       11,247,812   9,697,081       1,231,388     125,774       199,429       11,253,672  
Income (loss) from operations before income taxes 30,776 89,708 (48,216 ) (41,972 ) 30,296 264,877 185,231 (88,915 ) (199,429 ) 161,764
Income tax provision (benefit)   (355 )     35,699     (18,944 )     (10,916 )     5,484   96,324       75,092     (40,769 )     (29,939 )     100,708  
Income (loss) from continuing operations $ 31,131     $ 54,009   $ (29,272 )   $ (31,056 )   $ 24,812 $ 168,553     $ 110,139   $ (48,146 )   $ (169,490 )   $ 61,056  
 
Basic earnings (loss) per share from continuing operations $ 0.38 $ 0.66 $ (0.36 ) $ (0.38 ) $ 0.30 $ 1.90 $ 1.24 $ (0.54 ) $ (1.91 ) $ 0.69
Diluted earnings (loss) per share from continuing operations $ 0.37 $ 0.65 $ (0.36 ) $ (0.38 ) $ 0.30 $ 1.87 $ 1.22 $ (0.54 ) $ (1.91 ) $ 0.68
 
Basic weighted average shares outstanding 82,158 82,158 82,158 82,158 82,158 88,524 88,524 88,524 88,524 88,524
Diluted weighted average shares outstanding 83,112 83,112 82,158 82,158 83,112 89,970 89,970 88,524 88,524 89,970
 
Pretax margin 0.3 % 2.7 %
Commercial premium yield 4.7 % 5.1 %
Commercial premium PMPM $ 374.99 $ 358.04
Commercial health care cost trend 8.8 % 4.0 %
Commercial health care cost PMPM $ 332.09 $ 305.27
Commercial MCR 88.6 % 85.3 %
Medicare Advantage MCR 89.6 % 90.3 %
Medicaid MCR 89.7 % 85.5 %
Health plan services MCR 89.1 % 86.5 %
G&A expense ratio 8.6 % 8.6 %
Selling costs ratio 2.4 %

 

2.4 %
 
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. Also includes amounts related to the operations of government-sponsored managed care plans through our prior TRICARE contract and amounts related to the completion of the prior TRICARE contract.

 
3 Includes items related to the run-out of the Northeast business sold in 2009 and/or transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012, including lease impairment in the fourth quarter 2012 related to the company’s divested Northeast business.
 
4 Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits.
 
5 Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.
 
6 Includes expenses related to the termination of a medical management contract, litigation-related expenses and severance.
 
 
 
Health Net, Inc.
Disclosures Regarding Non-GAAP Financial Information
($ in millions)
                   
Set forth below is a reconciliation of adjusted days claims payable (DCP), a non-GAAP financial measure, 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 this 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. For the fourth quarter and full year 2011, the adjusted DCP also subtracts reserve for claims and other settlements related to discontinued operations from the claims reserve.
 
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. In addition, solely with respect to the fourth quarter and full year 2011, adjusted DCP excludes from claims reserve the reserves relating to discontinued operations. 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.
 
 
 
 
Reconciliation of Days Claims Payable: Q4 2012 Q3 2012 Q4 2011 FY 2012 FY 2011
(1) Reserve for Claims and Other Settlements - GAAP $ 1,027.4 $ 1,032.2 $ 912.1 $ 1,027.4 $ 912.1
Less: Reserve for Claims and Other Settlements related to discontinued operations   -     -     (31.7 )   -     (31.7 )
Reserve for Claims and Other Settlements excluding discontinued operations $ 1,027.4 $ 1,032.2 $ 880.4 $ 1,027.4 $ 880.4
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables   (100.4 )   (126.3 )   (59.0 )   (100.4 )   (59.0 )
(2) Reserve for Claims and Other Settlements - Adjusted $ 927.0 $ 905.9 $ 821.4 $ 927.0 $ 821.4
 
(3) Health Plan Services Cost - GAAP $ 2,322.3 $ 2,281.4 $ 2,149.9 $ 9,305.8 $ 8,539.8
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs   (856.3 )   (835.9 )   (753.9 )   (3,381.6 )   (3,041.7 )
(4) Health Plan Services Cost - Adjusted $ 1,466.0 $ 1,445.5 $ 1,396.0 $ 5,924.2 $ 5,498.1
 
(5) Number of Days in Period 92 92 92 366 365
 
= (1) / (3) * (5) Days Claims Payable on GAAP Basis - (using end of period reserve amount) 40.7 41.6 39.0 40.4 39.0
= (2) / (4) * (5) Days Claims Payable - Adjusted Basis (using end of period reserve amount) 58.2 57.7 54.1 57.3 54.5
 
 
 
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
                   
Health Plan Services
FY 2012       FY 2011       FY 2010
 
Reserve for claims (a), beginning of period $ 720.8 $ 727.5 $ 692.2
Incurred claims related to:
Current Year 4,947.5 4,733.0 4,644.2
Prior Years (c)   32.0         (96.5 )         (70.0 )
Total Incurred (b) 4,979.5 4,636.5 4,574.2
 
Paid claims related to:
Current Year 4,156.6 4,024.4 3,929.3
Prior Years   740.9         618.8           609.6  
Total Paid (b)   4,897.5         4,643.2           4,538.9  
 
 
Reserve for claims (a), end of period 802.8 720.8 727.5
Add:
Claims Payable (d) 91.6 111.0 123.6
Other (e) 133.0 80.3 90.9
                 
 
Reserves for claims and other settlements, end of period $ 1,027.4       $ 912.1         $ 942.0  
 
(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. In developing the revised estimate, there have been no changes in the approach used to determine the key actuarial assumptions, which are the completion factor and medical cost trend. Claims liabilities are estimated under actuarial standards of practice and generally accepted accounting principles. The majority of the reserve balance held at each period-end is associated with the most recent months’ incurred services because these are the services for which the fewest claims have been paid. The majority of the adjustments to reserves relate to variables and uncertainties associated with actuarial assumptions. The degree of uncertainty in the estimates of incurred claims is greater for the most recent months’ incurred services. Revised estimates for prior years are determined in each quarter based on the most recent updates of paid claims for prior years.
(d) Includes amount accrued for litigation and regulatory-related expenses.
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.

Contacts:

Health Net, Inc.
Investor Contact:
Angie McCabe, 818-676-8692
angie.mccabe@healthnet.com
or
Media Contact:
Brad Kieffer, 818-676-6833
brad.kieffer@healthnet.com

Source: Health Net, Inc.

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