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Health Net's CEO Discusses Q2 2012 Results - Earnings Call Transcript

I will now turn the call over to Jay Gellert, Health Net’s CEO.

Jay M. Gellert

Thank you, Angie, and good morning. I want to answer three basic questions this morning. One, how did this happen, two, how do you know we’ve gotten it all and three, can we give you confidence, we can fix this for 2013.

So first, how did this happen? Two factors had the greatest influence on second quarter results, commercial large group full network products and SPD experience particularly outside Los Angeles County. Let me talk first about commercial. Our lower than expected, second quarter was largely driven by factors arising from a select number of our largest groups, mostly multi-stage using our full network products.

In total, these accounts are running MCRs above a 100%. They include about a 100,000 members and were the primary factor driving a 150 basis point change in commercial spread guidance. The deterioration is largely driven by adverse risk selection. As we’ve noted in the past, price competition has been particularly intense in these large groups and the move to ASO continues to grow. ASO offerings tend to have lower benefits and/or higher out-of-pocket costs.

As a result, the traditional full network HMO products tends to retain a disproportionate number of high cost members, when offered by side-by-side with these ASO plans in Kaiser in slice accounts. This trend has exacerbated in recent years. The key in these specific groups is pricing to the risk profile without regard to retention. We will not sell or renew groups below cost in 2013.

We are taking other steps as well. We’ve modified provider network configurations and intensified medical management. We’re also offering our Tailored Network Products, as an alternative. These products have done remarkably well in small and mid market accounts and in the few large groups where they’ve been adopted. Because of these steps, we could lose up to 50,000 members among these largest groups next year. In the rest of our commercial book, mid markets and small groups as well as Tailored Network Products in large group, we believe we’re doing well.

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