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

Health Net, Inc. (HNT)

Q2 2012 Earnings Call

August 3, 2012 11:00 am ET

Executives

Angie McCabe – Vice President of Investor Relations

Jay M. Gellert – Chief Executive Officer, President and Director

Analysts

Joshua R. Raskin – Barclays Capital, Research Division

Sarah James – Wedbush Securities Inc.

Justin Lake – JPMorgan Securities LLC

Ana Gupte – Sanford C. Bernstein & Co. LLC

Scott Fidel – Deutsche Bank

Matthew Borsch – Goldman Sachs

Chris Rigg – Susquehanna Financial Group

Kevin Fischbeck - Bank of America Merrill Lynch

David Windley – Jefferies & Co.

Carl McDonald – Citigroup

Peter Costa – Wells Fargo Advisors LLC

Presentation

Operator

Good morning, everyone, and welcome to this Health Net, Incorporated Second 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, Christie. And thank you all for joining us for a discussion of Health Net's second 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’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.

Recent regulatory filings showed that our small group, MCRs are among the lowest in California, helped by the rapid growth of Tailored Network Products. To further support this, if we put prior period development back into the proper period, we see year-over-year improvement in the overall California commercial MCR for the first half of 2012 even with the large group headwinds. We believe our success with Tailored Network products and in small and mid markets continues to meet the customer needs for affordability, while producing solid margins and growth. The steps we’ve outlined will serve to strengthen our California commercial franchise.

Let’s next review California Medicaid. The Medicaid MCR was up by 460 basis points sequentially, primarily due to the SPD population. As we said in the past, we’ve been booking the SPD members at a high MCR. As we completed the enrollment process and the experience with the new book matured, it is now cleared that the MCR for these members was greater than a 100%.

The experience is centered in certain counties where institutional costs are well above projection. We also have had more high-risk patients than anticipated in areas such as end-stage renal disease. The patients recognized some of these issues and we are currently engaged in what we believe are productive discussions with the state. These discussion encompass a wide range of issues including past rate disputes, the adequacy of current and future rates and the structure of the SPD population.

We are hopeful that these discussions will result in rates that meet the state’s stated [2% to] 4% profit margin range for contracting plans. Let me add a few words about the dual eligibles. We’re making progress internally and continue to work with the state on many issues. We expect to hear about rates next month and still expect to begin enrolling Dual in the first half of next year. We will make sure that any dual activity is premised on adequate rate, keeping our SPG experience in mind.

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