Health Net (HNT) Q1 2012 Earnings Call May 03, 2012 11:30 am ET Executives Angie McCabe - Vice President of Investor Relations Jay M. Gellert - Chief Executive Officer, President and Director Joseph C. Capezza - Chief Financial Officer, Executive Vice President and Treasurer Analysts Matthew Borsch - Goldman Sachs Group Inc., Research Division Joshua R. Raskin - Barclays Capital, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Peter H. Costa - Wells Fargo Securities, LLC, Research Division Ana Gupte - Sanford C. Bernstein & Co., LLC., Research Division Charles Andrew Boorady - Crédit Suisse AG, Research Division Christian Rigg - Susquehanna Financial Group, LLLP, Research Division Carl R. McDonald - Citigroup Inc, Research Division Brian Wright Christine Arnold - Cowen and Company, LLC, Research Division Presentation Operator Good morning, everyone, and welcome to this Health Net, Inc. First Quarter 2012 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead. Angie McCabe Thank you, Tanya. Thank you for joining us for a discussion of Health Net's first quarter 2012 results. During this call, we will make forward-looking statements that are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC, as well as the cautionary statements in our press release issued in advance of this call.
In today's call, we will refer to adjusted days claims payable. This adjusted metric is not being presented in accordance with generally accepted accounting principles or GAAP. Please refer to today's press release, which is available on the company's website for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure, days claims payable.
I will now turn the call over to Jay Gellert, Health Net CEO. Jay M. Gellert Thank you, Angie. I want to get directly to the issues impacting our first quarter and our revised guidance for 2012. After that, I'll spend just a few moments on other factors influencing the first quarter, and then open it up to your questions. As you've seen in our release, we recorded $67 million in adverse medical claims development from prior periods in the first quarter of 2012. The adverse development was due to an underestimate of our incurred but not reported claims liability at year-end 2011. As we indicated, it was the result of an unanticipated flattening of our commercial medical claims trend, coupled with a larger-than-expected impact from the implementation of HIPAA 5010, the new claims coding system mandated by the federal government. We did not have similar trend expectations in Medicare and Medicaid. As a result, we had adequate reserves for those lines. In late March, we saw substantial uptick in claims for 2011 service date coming from our intermediaries. The level was above our expectation. It led to slower claims completion factors than anticipated. This led to the unanticipated increase in commercial development. We believe that the 5010 issues have now been essentially resolved. We have seen the daily claims submissions have settled down to a reasonable and expected level. The $67 million of adverse development impacts our run rate for 2012. In addition, we recognized the $67 million in prior development in the first quarter. Therefore, we have adjusted the low end of our guidance to reflect the $134 million pretax impact of the adverse development and the run rate impact.As a result of prior period development booked in the first quarter and the higher commercial health care costs run rate entering 2012, we now expect commercial health care cost to be higher than our premium yields on a reported basis by 200 to 220 basis points.
In giving this guidance, we additionally took into account, first, our premium yields are coming in higher than previous guidance by about 50-basis-point, as we continue to hold the line on pricing. The pricing trend assumptions we had used were primarily based on claims experienced through the first half of 2011. They are basically unchanged even when we look at the fourth quarter of '11 with the prior period development included. We are still confident that our pricing adequately reflects underlying run rate medical claims trends. Second, as we've earlier indicated, we have a new pharmacy agreement with CVS Caremark that will improve our pharmacy trend. And third, negotiated provider unit costs are coming in slightly below expectations. We are working on several other initiatives aimed at improving our results throughout the remainder of 2012. We are introducing new tailored network products in the second quarter. We are renegotiating provider contracts to improve unit cost trends. And there are many other contracting medical management expense and revenue initiatives. Now let me discuss the impact the prior period development has on past and projected trends. We saw decelerating commercial trends throughout '11. With the $67 million of prior period development now reflected, we see that our medical cost trends through the second half of '11 have essentially leveled out at a slightly lower level than the trends in the first half of last year. We have indicated in prior presentations that our 2012 outlook of trend assumed stable underlying utilization trends. The resulting trends through the fourth quarter of 2011, after including the prior period development, are consistent with that outlook. To date, our first quarter 2012 claims experience also supports stable underlying utilization trends.Now let's turn to other activities in the quarter. We continue to grow the tailored network products. Overall commercial enrollment declined a bit more than expected due to a few large group account losses. We believe these losses are due primarily to our continued pricing discipline.
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