Health Net Reports Second Quarter 2012 GAAP Net Income Of $124.6 Million, Or $1.48 Per Diluted Share

Health Net, Inc. (NYSE: HNT) today announced 2012 second quarter GAAP net income of $124.6 million, or $1.48 per diluted share, compared with $58.3 million, or $0.63 per diluted share, for the second 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 as discontinued operations.

The 2012 second quarter GAAP results include:
  1. a $119.4 million net gain from the sale of discontinued operations, representing the company’s Medicare PDP business that was sold to an affiliate of CVS Caremark Corporation on April 1, 2012;
  2. a $6.5 million pretax loss related to the company’s divested operations and services; and
  3. $10.8 million in expenses related to the company’s general and administrative (G&A) cost reduction efforts.

For the second quarter of 2012, the company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net earnings of $15.9 million, or $0.19 per diluted share, compared with $71.0 million, or $0.77 per diluted share, for the second quarter of 2011.

Two key factors impacting the performance in the second quarter of 2012 were:
  1. higher than expected commercial health care costs primarily arising from a select number of large group accounts with membership in full-network products; and
  2. higher than expected Medicaid health care costs primarily arising from the senior and persons with disabilities (SPDs) membership.

The $61.0 million in adverse prior period development in the second quarter of 2012 includes $48.9 million of adverse prior development related to the first quarter of 2012. The majority of this adverse prior period development is attributable to the commercial business.

“We believe that we have identified and are on the path to resolving the issues in the commercial and Medicaid businesses that impacted our second quarter performance,” said Jay Gellert, Health Net’s chief executive officer. “We identified specific commercial large group accounts that contributed to increased health care costs early enough this year. We are adjusting rates, modifying network configurations, and taking other actions to achieve substantial commercial improvement in 2013.

“We currently are actively engaged in what we believe are productive discussions with the state of California’s Department of Health Care Services (DHCS) on a wide range of issues, including rates for Medi-Cal and the SPDs,” Gellert continued. “Based on our experience to date, current SPD rates are inadequate. We are hopeful that these discussions with DHCS will result in a process intended to ensure adequate rates going forward.

“We are revising our full-year 2012 earnings guidance for the combined Western Region and Government Contracts segments to a range of $1.00 to $1.10 per diluted share due to the commercial large group and Medicaid issues,” Gellert added. “This guidance also reflects $20 million to $25 million in incremental G&A costs associated with the implementation of the dual-eligible demonstration pilots in California.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 7.1 percent in the second quarter of 2012 to $2.8 billion from $2.7 billion in the second quarter of 2011.

Health plan services premium revenues increased by approximately 7.2 percent to $2.6 billion in the second quarter of 2012 compared with $2.4 billion in the second quarter of 2011.

Health plan services expenses increased 11.1 percent to $2.4 billion in the second quarter of 2012 compared with $2.1 billion in the second quarter of 2011.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at June 30, 2012 was approximately 2.6 million members, or essentially flat compared with enrollment at June 30, 2011. Total enrollment in the company’s California health plans at June 30, 2012 was also flat compared with enrollment at June 30, 2011.

Western Region commercial enrollment at June 30, 2012 declined 7.4 percent to approximately 1.3 million members from enrollment at June 30, 2011.

“Overall commercial enrollment declined primarily due to competitive markets,” said Jim Woys, Health Net’s chief operating officer. “However, we are very pleased that membership in our tailored network products grew by 6.5 percent to more than 450,000 members since June 30, 2011. We believe these products will continue to perform well and membership will continue to grow as they provide comprehensive benefits at affordable prices, positioning them well for the exchanges.”

As of June 30, 2012, tailored network products accounted for 35.2 percent of the company’s Western Region commercial enrollment compared with 30.5 percent at June 30, 2011.

Medicaid enrollment in California at June 30, 2012 was approximately 1.1 million members, an increase of 97,000 members, or 10.1 percent, from June 30, 2011.

Enrollment in the company’s Medicare Advantage (MA) plans in the Western Region at June 30, 2012 was 228,000 members, an increase of 11.2 percent compared with June 30, 2011.

Revenues

Total revenues in the Western Region in the second quarter of 2012 were approximately $2.7 billion compared with $2.5 billion in the second quarter of 2011.

Net investment income in the Western Region was $24.7 million in the second quarter of 2012 compared with $25.1 million in the second quarter of 2011 and $22.3 million in the first quarter of 2012.

Health Plan Services Expenses

Health plan services expenses in the Western Region were $2.4 billion in the second quarter of 2012 compared with approximately $2.1 billion in the second quarter of 2011.

Commercial Premium Yields and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 4.6 percent to $373 in the second quarter of 2012 compared with $357 in the second quarter of 2011.

Commercial health care costs PMPM in the Western Region increased by 8.2 percent to approximately $331 in the second quarter of 2012 compared with $306 in the second quarter of 2011.

“The 360 basis point negative spread between commercial premium yields and health care costs PMPM was primarily due to the adverse prior period development in the second quarter and margin pressure due to emerging adverse risk selection in the company’s largest commercial accounts,” Woys said. “We are revising our full-year 2012 guidance on the commercial spread to negative 350 to 400 basis points due to the adverse prior period development.”

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 90.1 percent in the second quarter of 2012 compared with 86.9 percent in the second quarter of 2011. The Western Region commercial MCR was 88.7 percent in the second quarter of 2012 compared with 85.7 percent in the second quarter of 2011.

The MA MCR in the Western Region was 92.0 percent in the second quarter of 2012 compared with 90.9 percent in the second quarter of 2011 primarily due to $14.4 million of adverse prior period development in the second quarter of 2012 related to the first quarter of 2012.

“The MA MCR for the first half of 2012 was 89.9 percent compared with 90.0 percent in the first half of 2011. These results are consistent with our goal to reduce the MA MCR in 2012 compared with 2011,” said Woys.

The Medicaid MCR was 91.3 percent in the second quarter of 2012 compared with 85.2 percent in the second quarter of 2011. The increase was due to higher claims experience in the company’s SPD membership.

G&A Expenses

G&A expense in the Western Region was approximately $218.7 million in the second quarter of 2012 compared with $197.4 million in the second quarter of 2011. The G&A expense ratio was 8.3 percent in the second quarter of 2012 compared with 8.1 percent in the second quarter of 2011.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues were $176.2 million in the second quarter of 2012 compared with $171.0 million in the second quarter of 2011.

Government Contracts expenses were $152.7 million in the second quarter of 2012 compared with $130.8 million in the second quarter of 2011.

Pretax income from the Government Contracts segment declined by $16.7 million in the second quarter of 2012 compared with the second quarter of 2011. The decline in pretax income was primarily due to legacy benefits from the company’s previous TRICARE contract that positively impacted pretax income in the second quarter of 2011.

BALANCE SHEET

Cash and investments as of June 30, 2012 were $2.1 billion compared with $1.7 billion as of June 30, 2011.

Reserves for claims and other settlements as of June 30, 2012 were $1.0 billion compared with $900.7 million as of June 30, 2011 and $958.1 million as of March 31, 2012.

Days claims payable (DCP) for the second quarter of 2012 was 39.0 days compared with 38.6 days in the second quarter of 2011 and 37.2 days in the first quarter of 2012.

On an adjusted 1 basis, DCP in the second quarter of 2012 was 54.3 days compared with 52.0 days in the second quarter of 2011 and 53.0 days in the first quarter of 2012.

The company’s debt-to-total capital ratio was 24.1 percent as of June 30, 2012 compared with 26.4 percent as of March 31, 2012 and 28.2 percent as of June 30, 2011.

CASH FLOW FROM OPERATIONS

Operating cash flow was $119.8 million in the second quarter of 2012. The company received an extra monthly Medicaid payment of approximately $102.0 million from the state of California during the second quarter.

“We expect operating cash flow of approximately $10 million for the full-year 2012. This reflects the loss from discontinued operations. However, the cash benefit from the gain on sale associated with the sold Medicare PDP business is reflected in Cash Flow from Investing Activities,” said Joseph Capezza, Health Net’s chief financial officer.

SHARE REPURCHASE

From April 1 through August 1, 2012, Health Net repurchased approximately 1.8 million shares of its common stock for $44.6 million at an average price of $24.77 per share. At August 1, 2012, approximately $355.4 million of authorization under the company’s existing $400 million share repurchase program remained.

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 administer run-out claims and provide certain administrative services for the Northeast business pursuant to claims servicing agreements in place with UnitedHealthcare and its affiliates.

2012 GUIDANCE

Health Net is reducing its 2012 full-year guidance for GAAP earnings per diluted share to a range of $1.45 to $1.55, or $1.00 to $1.10 for the combined Western Region and Government Contracts segments.

Following is a table with specific 2012 guidance metrics.

Metric
               

2012 Guidance

Year-end membership(a)
               

Commercial
-9% to -10% (previously -7% to -9%)

Medicaid
+7% to +8% (previously +3% to +5%)

Medicare Advantage
+11% to +13%
 

Total Western Region
                -1% to -2%
 

Consolidated revenues(b)(c)
               

~$11.0 billion to $11.5 billion
 
Commercial premium yields

PMPM(a)
                ~ +4.8% to +5.3%
 
Commercial health care costs 350 to 400 bps > premium yields PMPM

PMPM(a)
               

(previously ~200 to 220 basis points > premium yields PMPM)
 

Selling cost ratio(a)
~2.3% to 2.4%
 

G&A expense ratio(a)(c)
                ~8.5% to 8.7%
 

Tax rate(b)
30.0% to 31.0%

 
                (previously 37.0% to 38.0%)
 
Weighted-average fully

diluted shares outstanding(d)
                ~83.0 million to 84.0 million
 

GAAP EPS(c)(d)

$1.45 to $1.55 (previously $2.85 to $3.00)
 
Combined Western Region
and Government Contracts

EPS(c)(d)
               

$1.00 to $1.10 (previously $2.35 to $2.50)
(a)   For the company’s Western Region Operations segment
(b) For the combined Western Region Operations and Government Contracts segments
(c) These metrics include the impact of the sale of the company’s Medicare PDP business that closed on April 1, 2012.
(d) The company’s guidance does not include the impact of share repurchases other than those to counter dilution.
 

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s second quarter 2012 results during a conference call on Friday, August 3, 2012, 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)         855.859.2056 (Replay – Domestic)
706.643.5711 (International) 404.537.3406 (Replay – International)
 

The access code for the live conference call and replay is 96830520. A replay of the conference call will be available through August 10, 2012. 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, 2011, Form 10-Q for the quarter ended March 31, 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, through its subsidiaries, provides and administers health benefits to approximately 5.5 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’s behavioral health services subsidiary, Managed Health Network, Inc., provides behavioral health, substance abuse and employee assistance programs to approximately 4.8 million individuals, including Health Net’s own health plan members. Health Net’s subsidiaries also offer managed health care products related to prescription drugs, and offer 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 the company’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, 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, 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; any liabilities incurred in connection with our divested operations; 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 Report on Form 10-Q filed with the SEC, and the risks discussed in Health Net’s other 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 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 as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Form 10-Q for the period ended June 30, 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
March 31, 2012     June 30, 2011
June 30, March 31, June 30, Increase/ % Increase/ %
2012     2012     2011     (Decrease)     Change     (Decrease)     Change
California
Large Group 745 754 834 (9 ) (1.2 )% (89 ) (10.7 )%
Small Group and Individual 303     302     328     1       0.3 %     (25 )     (7.6 )%
Commercial Risk 1,048 1,056 1,162 (8 ) (0.8 )% (114 ) (9.8 )%
Medicare Advantage 141 139 125 2 1.4 % 16 12.8 %
Medi-Cal       1,060     1,034     963     26       2.5 %     97       10.1 %
Total California       2,249     2,229     2,250     20       0.9 %     (1 )    

0.0

%
 
Arizona
Large Group 84 82 75 2 2.4 % 9 12.0 %
Small Group and Individual 61     62     56     (1 )     (1.6 )%     5       8.9 %
Commercial Risk 145 144 131 1 0.7 % 14 10.7 %
Medicare Advantage       43     43     41     0       0.0 %     2       4.9 %
Total Arizona       188     187     172     1       0.5 %     16       9.3 %
 
Oregon
Large Group 32 35 49 (3 ) (8.6 )% (17 ) (34.7 )%
Small Group and Individual 56     55     42     1       1.8 %     14       33.3 %
Commercial Risk 88 90 91 (2 ) (2.2 )% (3 ) (3.3 )%
Medicare Advantage       44     44     39     0       0.0 %     5       12.8 %
Total Oregon       132     134     130     (2 )     (1.5 )%     2       1.5 %
 
                                                 
Total Health Plan Enrollment
Large Group 861 871 958 (10 ) (1.1 )% (97 ) (10.1 )%
Small Group and Individual 420     419     426     1       0.2 %     (6 )     (1.4 )%
Commercial Risk 1,281 1,290 1,384 (9 ) (0.7 )% (103 ) (7.4 )%
Medicare Advantage 228 226 205 2 0.9 % 23 11.2 %
Medi-Cal/Medicaid 1,060     1,034     963     26       2.5 %     97       10.1 %
Western Region Operations 2,569 2,550 2,552 19 0.7 % 17 0.7 %
 
Medicare PDP (stand-alone) 0 424 389 (424 ) (100.0 )% (389 ) (100.0 )%
                                     
Total       2,569     2,974     2,941     (405 )     (13.6 )%     (372 )     (12.6 )%
 
 
TRICARE - North Contract Eligibles       2,884     3,004     3,010     (120 )     (4.0 )%     (126 )     (4.2 )%
 
 
                             
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
 
    Change from
March 31, 2012     June 30, 2011
June 30, March 31, June 30, Increase/ % Increase/ %
2012     2012     2011     (Decrease)     Change     (Decrease)     Change
 
Large Group
California 745 754 834 (9 ) (1.2 )% (89 ) (10.7 )%
Arizona 84 82 75 2 2.4 % 9 12.0 %
Oregon 32     35     49     (3 )     (8.6 )%     (17 )     (34.7 )%
861     871     958     (10 )     (1.1 )%     (97 )     (10.1 )%
 
Small Group and Individual
California 303 302 328 1 0.3 % (25 ) (7.6 )%
Arizona 61 62 56 (1 ) (1.6 )% 5 8.9 %
Oregon 56     55     42     1       1.8 %     14       33.3 %
420     419     426     1       0.2 %     (6 )     (1.4 )%
 
Commercial Risk
California 1,048 1,056 1,162 (8 ) (0.8 )% (114 ) (9.8 )%
Arizona 145 144 131 1 0.7 % 14 10.7 %
Oregon 88     90     91     (2 )     (2.2 )%     (3 )     (3.3 )%
1,281     1,290     1,384     (9 )     (0.7 )%     (103 )     (7.4 )%
 
Medicare Advantage
California 141 139 125 2 1.4 % 16 12.8 %
Arizona 43 43 41 0 0.0 % 2 4.9 %
Oregon 44     44     39     0       0.0 %     5       12.8 %
228 226 205 2 0.9 % 23 11.2 %
 
Medi-Cal/Medicaid
California 1,060 1,034 963 26 2.5 % 97 10.1 %
 
                                                 
Total Health Plan Enrollment
Large Group 861 871 958 (10 ) (1.1 )% (97 ) (10.1 )%
Small Group and Individual 420     419     426     1       0.2 %     (6 )     (1.4 )%
Commercial Risk 1,281 1,290 1,384 (9 ) (0.7 )% (103 ) (7.4 )%
Medicare Advantage 228 226 205 2 0.9 % 23 11.2 %

 
Medi-Cal/Medicaid 1,060     1,034     963     26       2.5 %     97       10.1 %
Western Region Operations 2,569 2,550 2,552 19 0.7 % 17 0.7 %
 
Medicare PDP (stand-alone) 0 424 389 (424 ) (100.0 )% (389 ) (100.0 )%
                                     
Total       2,569     2,974     2,941     (405 )     (13.6 )%     (372 )     (12.6 )%
 
 
TRICARE - North Contract Eligibles       2,884     3,004     3,010     (120 )     (4.0 )%     (126 )     (4.2 )%
 
 
                         
Health Net, Inc.
Consolidated Statements of Operations
($ in thousands, except per share data)
     
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
REVENUES: 2012 2012 2011
Health plan services premiums $ 2,618,927 $ 2,620,949 $ 2,443,097
Government contracts 176,248 181,362 171,015
Net investment income 24,697 22,304 25,091
Administrative services fees and other income 8,662 5,784 2,079
Divested operations and services revenue   12,805   -     11,021  
Total revenues   2,841,339   2,830,399     2,652,303  
 
EXPENSES:
Health plan services 2,358,455 2,343,659 2,123,285
Government contracts 153,406 162,310 130,828
General and administrative 228,756 237,276 201,631
Selling 58,390 61,561 57,417
Depreciation and amortization 7,385 7,430 8,661
Interest 8,246 8,628 8,238
Divested operations and services expense 19,290 23,096 42,356
Adjustment to loss on sale of Northeast subsidiaries   -   -     (6,283 )
Total expenses   2,833,928   2,843,960     2,566,133  
Income (loss) from continuing operations before income taxes 7,411 (13,561 ) 86,170
Income tax provision (benefit)   2,241   (5,427 )   29,360  
Income (loss) from continuing operations   5,170   (8,134 )   56,810  
 
Discontinued operation:
(Loss) income from discontinued operation, net of tax - (18,452 ) 1,490
Gain on sale of discontinued operation, net of tax   119,440   -     -  
Gain (loss) on discontinued operation, net of tax   119,440   (18,452 )   1,490  
 
Net income (loss) $ 124,610 $ (26,586 ) $ 58,300  
 
Net income (loss) per share-basic:
Income (loss) from continuing operations $ 0.06 $ (0.10 ) $ 0.63
Gain (loss) on discontinued operation, net of tax   1.44   (0.22 )   0.01  
Net income (loss) per share-basic $ 1.50 $ (0.32 ) $ 0.64  
 
Net income (loss) per share-diluted:
Income (loss) from continuing operations $ 0.06 $ (0.10 ) $ 0.62
Gain (loss) on discontinued operation, net of tax   1.42   (0.22 )   0.01  
Net income (loss) per share-diluted $ 1.48 $ (0.32 ) $ 0.63  
 
Weighted average shares outstanding:
Basic 83,255 82,513 90,539
Diluted 84,037 82,513 92,046
 
 
                             

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)
 
June 30, March 31, June 30,
2012 2012 2011
ASSETS
Current Assets
Cash and cash equivalents $ 633,144 $ 391,032 $ 166,503
Investments - available for sale 1,515,200 1,447,630 1,576,132
Premiums receivable, net 350,750 462,965 348,567
Amounts receivable under government contracts 247,405 234,120 334,868

Incurred but not reported (IBNR) health care costs receivable under TRICARE North contract
- - 52,373
Other receivables 220,293 165,533 93,868
Deferred taxes 69,409 100,639 16,990
Assets of discontinued operation held for sale - 145,240 -
Other assets   128,340     177,337     232,636  
Total current assets 3,164,541 3,124,496 2,821,937
Property and equipment, net 166,379 152,524 122,713
Goodwill 565,886 565,886 605,886
Other intangible assets, net 18,985 19,842 22,413
Deferred taxes 8,261 - 41,886
Other noncurrent assets   109,400     114,330     120,535  
Total Assets $ 4,033,452   $ 3,977,078   $ 3,735,370  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 1,010,493 $ 958,124 $ 900,724
Health care and other costs payable under government contracts 86,187 77,892 94,219
IBNR health care costs payable under TRICARE North contract - - 52,373
Unearned premiums 368,699 365,772 160,613
Borrowings under revolving credit facility - - 185,000
Liabilities of discontinued operation held for sale - 41,823 -
Accounts payable and other liabilities   298,307     355,743     229,735  
Total current liabilities 1,763,686 1,799,354 1,622,664
Senior notes payable 398,992 398,941 398,788
Borrowings under revolving credit facility 90,000 112,500 -
Deferred taxes - 7,272 -
Other noncurrent liabilities   241,734     234,698     223,962  
Total Liabilities   2,494,412     2,552,765     2,245,414  
 
Stockholders' Equity
Common stock 149 149 147
Additional paid-in capital 1,318,004 1,310,438 1,265,061
Treasury common stock, at cost (2,056,272 ) (2,042,367 ) (1,826,076 )
Retained earnings 2,269,483 2,144,873 2,049,444
Accumulated other comprehensive income   7,676     11,220     1,380  
Total Stockholders' Equity   1,539,040     1,424,313     1,489,956  
Total Liabilities and Stockholders' Equity $ 4,033,452   $ 3,977,078   $ 3,735,370  
 
Debt-to-Total Capital Ratio 24.1 % 26.4 % 28.2 %
 
 
                             

Health Net, Inc.

Condensed Consolidated Statements of Cash Flows

(Amount in thousands)
 
Quarter Ended Quarter Ended Quarter Ended
June 30, March 31, June 30,
2012 2012 2011
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 124,610 $ (26,586 ) $ 58,300

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization and depreciation 7,385 7,430 8,661
Share-based compensation expense 5,683 12,384 5,867
Deferred income taxes 6,476 2,977 17,671
Excess tax benefits from share-based compensation (163 ) (5,896 ) (113 )
Gain on sale of discontinued operation (119,440 ) - -
Adjustment to loss on sale of business - - (6,283 )
Net realized gain on sale on investments (12,431 ) (12,958 ) (14,653 )
Other changes 884 6,163 4,502
Changes in assets and liabilities:
Premiums receivable and unearned premiums 115,142 (87,970 ) 58,032
Other current assets, receivables and noncurrent assets (26,672 ) (25,684 ) (21,269 )
Amounts receivable/payable under government contracts (6,029 ) (14,725 ) (28,487 )
Reserves for claims and other settlements 52,369 84,457 10,848
Accounts payable and other liabilities   (28,048 )   64,575     (193,315 )
Net cash provided by (used in) operating activities   119,766     4,167     (100,239 )
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 364,420 650,832 799,331
Maturities of investments 30,142 38,958 43,490
Purchases of investments (459,328 ) (551,285 ) (742,362 )
Purchases of property and equipment (22,287 ) (15,373 ) (10,707 )
Net cash received for sale of businesses 248,238 - -
Sales and purchases of restricted investments and other   4,185     2,710     1,497  
Net cash provided by investing activities   165,370     125,842     91,249  
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 2,174 14,415 3,806
Repurchases of common stock (9,556 ) (19,238 ) (76,379 )
Excess tax benefits from share-based compensation 163 5,896 113
Borrowings under financing arrangements - 100,000 467,500
Repayment of borrowings under financing arrangements (22,500 ) (100,000 ) (282,500 )
Net (decrease) increase in checks outstanding, net of deposits - - (33,751 )
Customer funds administered   (13,305 )   29,697     (45,593 )
Net cash (used in) provided by financing activities   (43,024 )   30,770     33,196  
 
Net increase in cash and cash equivalents 242,112 160,779 24,206
Cash and cash equivalents, beginning of period   391,032     230,253     142,297  
Cash and cash equivalents, end of period $ 633,144   $ 391,032   $ 166,503  
 
 
 
Health Net, Inc.
SEGMENT INFORMATION
($ in thousands, except per share and PMPM data)
                             
The following table presents Health Net's operating segment information.
 
Quarter Ended June 30, 2012 Quarter Ended March 31, 2012   Quarter Ended June 30, 2011
Divested Divested Divested
Western Region

Government
Operations Corporate/ Western Region Government Operations Corporate/ Western Region Government Operations

Corporate/

 
Operations1  

Contracts2
  and Services3  

Other4, 5
  Consolidated Operations1   Contracts2   and Services3  

Other4, 5
  Consolidated   Operations1   Contracts2   and Services3  

Other4, 5
  Consolidated
 
Health plan services premiums $ 2,618,927 $ 2,618,927 $ 2,620,949 $ 2,620,949 $ 2,442,771 $ 326 $ 2,443,097
Government contracts $ 176,248 176,248 181,362 181,362 171,015 171,015
Net investment income 24,697 24,697 22,304 22,304 25,081 10 25,091
Administrative services fees and other income 8,662 8,662 5,784 5,784 2,079 2,079
Divested operations and services revenue         $ 12,805           12,805                   -             11,021           11,021  
Total revenues 2,652,286 176,248 12,805 - 2,841,339 2,649,037 181,362 - - 2,830,399 2,469,931 171,015 11,357 - 2,652,303
Health plan services 2,358,400 14 41 2,358,455 2,349,377 126 (5,844 ) 2,343,659 2,123,745 (160 ) (300 ) 2,123,285
Government contracts 152,705 701 153,406 159,323 2,987 162,310 130,802 26 130,828
G&A excluding insurance, taxes and fees 196,907 (353 ) 10,074 206,628 209,780 (456 ) 6,467 215,791 178,520 419 3,561 182,500
Insurance, taxes and fees   21,782           346       -       22,128   21,024           461           21,485     18,860           271       -       19,131  
G&A including insurance, taxes and fees 218,689 (7 ) 10,074 228,756 230,804 5 6,467 237,276 197,380 690 3,561 201,631
Selling 58,390 58,390 61,561 61,561 57,349 68 57,417
Depreciation and amortization 7,385 7,385 7,429 1 7,430 8,655 6 8,661
Interest 8,246 8,246 8,628 8,628 8,053 185 8,238
Divested operations and services expense 19,290 19,290 23,096 23,096 42,356 42,356
Adjustment to loss on sale of Northeast health plans                   -                   -             (6,283 )         (6,283 )
Total expenses   2,651,110       152,705     19,297       10,816       2,833,928   2,657,799       159,323     23,228       3,610       2,843,960     2,395,182       130,802     36,862       3,287       2,566,133  
 
Income (loss) from operations before income taxes 1,176 23,543 (6,492 ) (10,816 ) 7,411 (8,762 ) 22,039 (23,228 ) (3,610 ) (13,561 ) 74,749 40,213 (25,505 ) (3,287 ) 86,170
Income tax (benefit) provision   (452 )     9,305     (2,537 )     (4,075 )     2,241   (3,685 )     8,776     (8,846 )     (1,672 )     (5,427 )   27,664       16,341     (12,864 )     (1,781 )     29,360  
Income (loss) from continuing operations $ 1,628     $ 14,238   $ (3,955 )   $ (6,741 )   $ 5,170 $ (5,077 )   $ 13,263   $ (14,382 )   $ (1,938 )   $ (8,134 ) $ 47,085     $ 23,872   $ (12,641 )   $ (1,506 )   $ 56,810  
 
Basic earnings (loss) per share from continuing operations $ 0.02 $ 0.17 $ (0.05 ) $ (0.08 ) $ 0.06 $ (0.06 ) $ 0.16 $ (0.17 ) $ (0.02 ) $ (0.10 ) $ 0.52 $ 0.26 $ (0.14 ) $ (0.02 ) $ 0.63
Diluted earnings (loss) per share from continuing operations $ 0.02 $ 0.17 $ (0.05 ) $ (0.08 ) $ 0.06 $ (0.06 ) $ 0.16 $ (0.17 ) $ (0.02 ) $ (0.10 ) $ 0.51 $ 0.26 $ (0.14 ) $ (0.02 ) $ 0.62
 
Basic weighted average shares outstanding 83,255 83,255 83,255 83,255 83,255 82,513 82,513 82,513 82,513 82,513 90,539 90,539 90,539 90,539 90,539
Diluted weighted average shares outstanding 84,037 84,037 83,255 83,255 84,037 82,513 84,287 82,513 82,513 82,513 92,046 92,046 90,539 90,539 92,046
 
 
Pretax margin 0.04 % -0.3 % 3.0 %
Commercial premium yield 4.6 % 5.3 % 4.7 %
Commercial premium PMPM $ 372.91 $ 374.58 $ 356.51
Commercial health care cost trend 8.2 % 12.3 % 4.0 %
Commercial health care cost PMPM $ 330.71 $ 342.29 $ 305.63
Commercial MCR 88.7 % 91.4 % 85.7 %
Medicare Advantage MCR 92.0 % 87.9 % 90.9 %
Medicaid MCR 91.3 % 86.7 % 85.2 %
Health plan services MCR 90.1 % 89.6 % 86.9 %
G&A expense ratio 8.3 % 8.8 % 8.1 %
Selling costs ratio 2.2 % 2.3 % 2.3 %
 
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 new 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 transition and run-out related expenses related to the Medicare PDP business that was sold on April 1, 2012.
 
4

Includes litigation reserve true-ups related to previous accruals for class action lawsuits and related legal expenses.
 
5 Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy.
 
   
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 second quarter of 2011, 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 second quarter of 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:       Q2 2012           Q1 2012         Q2 2011
(1 )  

Reserve for Claims and Other Settlements - GAAP
$ 1,010.5 $ 958.1 a $ 900.7
Less: Reserve for Claims and Other Settlements related to discontinued operations   -     -     (30.9 )
Reserve for Claims and Other Settlements excluding discontinued operations $ 1,010.5 $ 958.1 $ 869.8
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables   (106.5 )   (85.6 )   (90.1 )
(2 ) Reserve for Claims and Other Settlements - Adjusted $ 904.0 $ 872.5 $ 779.7
 
(3 )

Health Plan Services Cost - GAAP
$ 2,358.5 $ 2,343.7 $ 2,123.3
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs   (842.9 )   (846.5 )   (759.8 )
(4 ) Health Plan Services Cost - Adjusted $ 1,515.6 $ 1,497.2 $ 1,363.5
 
(5 ) Number of Days in Period 91 91 91
 
= (1) / (3) * (5) Days Claims Payable on GAAP Basis - (using end of period reserve amount) 39.0 37.2 38.6
= (2) / (4) * (5) Days Claims Payable - Adjusted Basis (using end of period reserve amount) 54.3 53.0 52.0
 
a     Excludes $38.5 million of Medicare PDP related reserves for claims and other settlements classified as Liabilities held for sale.
 
 
                         
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
 
Health Plan Services
YTD 6/2012           FY 2011           FY 2010
 
Reserve for claims (a), beginning of period $ 720.8 $ 727.5 $ 692.2
 
Incurred claims related to:
Current Year 2,510.8 4,733.0 4,644.2
Prior Years (c)   32.9             (96.5 )             (70.0 )
Total Incurred (b) 2,543.7 4,636.5 4,574.2
 
Paid claims related to:
Current Year 1,761.3 4,024.4 3,929.3
Prior Years   705.7             618.8               609.6  
Total Paid (b)   2,467.0             4,643.2               4,538.9  
 
Reserve for claims (a), end of period 797.5 720.8 727.5
Add:
Claims Payable (d) 89.1 111.0 123.6
Other (e) 123.9 80.3 90.9
                         
 
Reserves for claims and other settlements, end of period $ 1,010.5           $ 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.

Copyright Business Wire 2010

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