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Health Net Reports Fourth Quarter 2012 GAAP Net Income Of $5.1 Million, Or $0.06 Per Diluted Share

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/

Operations 1

 

Contracts 2

 

and Services 3

 

Other 5,7

  Consolidated Operations 1   Contracts 2  

and Services 3

 

Other 5

  Consolidated Operations 1   Contracts 6   and Services 3  

Other 4,5

  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/
Operations 1   Contracts 2   and Services 3  

Other 4,5,6

  Consolidated   Operations 1   Contracts 2   and Services 3  

Other 4,5

  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.




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