Health Net, Inc. (NYSE:HNT) today announced 2013 fourth quarter GAAP net income of $19.8 million, or $0.25 per diluted share, compared with GAAP net income of $6.0 million, or $0.07 per diluted share, for the fourth quarter of 2012.

The fourth quarter 2013 GAAP net income includes an approximately $0.6 million benefit primarily related to a reduction in a legal settlement reserve.

For the full year 2013, the company reported GAAP net income of approximately $170.1 million, or $2.12 per diluted share, compared with approximately $122.1 million, or $1.47 per diluted share, for the full year 2012.

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $19.1 million, or $0.24 per diluted share, in the fourth quarter of 2013 compared with $29.0 million, or $0.35 per diluted share, in the fourth quarter of 2012.

The company’s Western Region and Government Contracts segments produced combined net income of approximately $177.4 million, or $2.21 per diluted share, for the full year 2013, and approximately $84.3 million, or $1.01 per diluted share, for the full year 2012.

“We are pleased with all that we accomplished in 2013,” said Jay Gellert, Health Net’s chief executive officer. “Consistent with the plan that we laid out at the beginning of 2013, our efforts produced significant improvement in profitability in our commercial and Medicaid businesses compared with 2012. In addition, there was no adverse prior year development in 2013.

“At the same time, we undertook substantial initiatives to prepare for the implementation of the Affordable Care Act (ACA) and California’s Coordinated Care Initiative (CCI),” continued Gellert. “Our general and administrative expenses in the fourth quarter of 2013 related to the implementation of the ACA were slightly higher than we anticipated to support better than expected individual health insurance exchange and Medicaid expansion enrollment growth for January 1, 2014 effective dates.

“Our 2014 GAAP earnings per diluted share guidance of at least $3.00 is based primarily on our expectation of an approximate 30 percent increase in total revenues, primarily driven by new and expanded programs that are expected to add approximately 600,000 new members by the end of 2014, lower medical care ratios in our commercial and Medicare Advantage businesses and a lower tax rate compared with 2013,” said Gellert.

CONSOLIDATED RESULTS

Health Net’s total revenues decreased 3.3 percent in the fourth quarter of 2013 to $2.7 billion from $2.8 billion in the fourth quarter of 2012.

Health plan services premium revenues decreased by 3.1 percent in the fourth quarter of 2013 to approximately $2.6 billion compared with approximately $2.6 billion in the fourth quarter of 2012.

Administrative services fees and other income was approximately $23.8 million in the fourth quarter of 2013 compared with approximately $1.7 million in the fourth quarter of 2012 and approximately $7.7 million in the third quarter of 2013.

“As we anticipated, administrative services fees and other income in the fourth quarter of 2013 increased sequentially and quarter-over-quarter due to a settlement related to a pharmacy contract and Medicaid revenue from the state of California related to the administration of the primary care physician parity reimbursement mandated by the ACA. We expect to realize additional Medicaid revenue and incur related costs in 2014,” said Jim Woys, Health Net’s chief operating officer.

Health plan services expenses decreased by approximately 4.4 percent in the fourth quarter of 2013 to approximately $2.2 billion compared with $2.3 billion in the fourth quarter of 2012.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at December 31, 2013 was 2.4 million members, a decrease of 4.1 percent from enrollment at December 31, 2012.

Total enrollment in the company’s California health plans decreased 2.8 percent from December 31, 2012 to December 31, 2013.

Western Region commercial enrollment at December 31, 2013 was approximately 1.1 million members, a 12.0 percent decrease compared with enrollment at December 31, 2012.

“Tailored network commercial membership represented approximately 38 percent of total Western Region commercial membership at December 31, 2013 compared with 35 percent at December 31, 2012,” said Woys. “This increase is consistent with our commercial strategy to improve the mix of our business in 2013, and we are pleased that we were able to accomplish this.”

Enrollment in the company’s Medicare Advantage plans in the Western Region at December 31, 2013 was 244,000 members, an increase of 4.3 percent compared with December 31, 2012.

Medicaid enrollment at December 31, 2013 was 1.1 million members, an increase of 3.0 percent, from December 31, 2012.

Revenues

Total revenues for the Western Region in the fourth quarter of 2013 were approximately $2.6 billion compared with $2.7 billion in the fourth quarter of 2012.

Net investment income for the Western Region was $11.6 million in the fourth quarter of 2013 compared with $19.1 million in the fourth quarter of 2012 and approximately $11.3 million in the third quarter of 2013.

Health Plan Services Expenses

Health plan services expenses in the Western Region were approximately $2.2 billion in the fourth quarter of 2013 compared with approximately $2.3 billion in the fourth quarter of 2012.

Commercial Premium Yield and Health Care Cost Trends

In the Western Region, commercial premiums per member per month (PMPM) increased by 3.4 percent to approximately $388 in the fourth quarter of 2013 compared with approximately $376 in the fourth quarter of 2012.

Commercial health care costs PMPM in the Western Region increased by 2.0 percent to approximately $340 in the fourth quarter of 2013 compared with approximately $333 in the fourth quarter of 2012.

Medical Care Ratios (MCR)

The health plan services MCR in the Western Region was 87.1 percent in the fourth quarter of 2013 compared with 88.2 percent in the fourth quarter of 2012. The full year 2013 Western Region health plan services MCR was 85.6 percent compared with 89.1 percent for the full year 2012.

The Western Region commercial MCR was 87.4 percent in the fourth quarter of 2013 compared with 88.6 percent in the fourth quarter of 2012 and 84.2 percent in the third quarter of 2013. The full year 2013 Western Region commercial MCR was 85.6 percent compared with 88.8 percent for the full year 2012.

“The fourth quarter 2013 commercial MCR was approximately 40 basis points higher than what was implicit in our guidance that we revised in the third quarter of 2013. This was due to higher than expected physician, outpatient and pharmacy utilization among individual members whose policies were cancelled due to the ACA,” said Woys.

The Medicare Advantage (MA) MCR was 90.5 percent in the fourth quarter of 2013 compared with 87.4 percent in the fourth quarter of 2012. The full year 2013 MA MCR in the Western Region was 90.6 percent compared with 89.3 percent for the full year 2012.

General and Administrative (G&A) Expenses

G&A expense in the Western Region was approximately $280.4 million in the fourth quarter of 2013 compared with $235.2 million in the fourth quarter of 2012. The G&A expense ratio was 10.9 percent in the fourth quarter of 2013 compared with 8.9 percent in the fourth quarter of 2012 and 10.2 percent in the third quarter of 2013. The G&A expense ratio for the full year 2013 was 10.3 percent compared with 8.6 percent for the full year 2012.

“The G&A expense ratio in the fourth quarter of 2013 increased 200 basis points compared with the fourth quarter of 2012 primarily as a result of reinstated California Medicaid premium taxes and our investments in preparing for the ACA, CCI and other initiatives. These administrative investments helped us smoothly add many new members in January 2014,” commented Woys.

In the fourth quarter of 2013, California Medicaid premium taxes were $24.4 million and contributed 90 basis points to the G&A expense ratio. There were no such comparable premium taxes in the fourth quarter of 2012.

GOVERNMENT CONTRACTS SEGMENT

Government Contracts revenues in the fourth quarter of 2013 were approximately $148.5 million compared with $161.7 million in the fourth quarter of 2012.

Government Contracts expenses in the fourth quarter of 2013 were $124.6 million compared with approximately $138.5 million in the fourth quarter of 2012.

The decrease in revenues and expenses was primarily due to the new Military and Family Life Counseling contract that began in the fourth quarter of 2012.

BALANCE SHEET

Cash and investments as of December 31, 2013 were $2.1 billion compared with approximately $2.2 billion as of December 31, 2012.

Reserves for claims and other settlements as of December 31, 2013 were approximately $984.1 million compared with $1.0 billion as of December 31, 2012 and approximately $990.2 million as of September 30, 2013.

Days claims payable (DCP) for the fourth quarter of 2013 was 40.6 days compared with 40.9 days in the fourth quarter of 2012 and 41.5 days in the third quarter of 2013.

On an adjusted 1 basis, DCP in the fourth quarter of 2013 was 57.9 days compared with 58.3 days in the fourth quarter of 2012 and 61.1 days in the third quarter of 2013. Adjusted 1 DCP in the fourth quarter of 2013 declined sequentially primarily due to the $15.5 million sequential decline in claims payables and an accelerated claims paydown in anticipation of new members with January 1, 2014 effective dates. In addition, incurred but not reported reserves (IBNR) increased sequentially from the third quarter of 2013 by $6.3 million.

The company’s debt-to-total capital ratio was 23.5 percent as of December 31, 2013 compared with 24.3 percent as of December 31, 2012 and 23.8 percent as of September 30, 2013.

CASH FLOW FROM OPERATIONS

Cash and investments at the parent were $209.0 million at December 31, 2013.

Operating cash flow was negative $71.9 million in the fourth quarter of 2013. For the full year 2013, operating cash flow was positive $95.8 million.

“Operating cash flow in the fourth quarter of 2013 was negatively impacted by the timing of payments related to state and federal health programs,” said Joseph Capezza, Health Net’s chief financial officer.

SHARE REPURCHASE UPDATE

For the full year 2013, Health Net repurchased approximately 2.7 million shares of its common stock for approximately $70.0 million at an average price of $26.34 per share. At December 31, 2013, approximately $280.0 million of authorization under the company’s existing $400 million share repurchase program remained.

2014 GUIDANCE

The company expects GAAP earnings per diluted share of at least $3.00 for the full year 2014. The year-over-year increase in earnings per diluted share is based primarily on the company’s expectation of an approximate 30 percent increase in total revenues, primarily driven by new and expanded programs that are expected to add approximately 600,000 new members by the end of 2014, lower medical care ratios in the company’s commercial and Medicare Advantage businesses and a lower tax rate compared with 2013. The table included in this release provides specific metrics.

CONFERENCE CALL

As previously announced, Health Net will discuss the company’s fourth quarter and year-end 2013 earnings results during a conference call on Tuesday, February 11, 2014, 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 toll-free)               (855) 859-2056 (Replay – Domestic toll-free)
(706) 643-5711 (International) (404) 537-3406 (Replay – International)

The access code for the live conference call and replay is 31392501. A replay of the conference call will be available through February 16, 2014. 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 will be presumed to have read Health Net’s Annual Report on Form 10-K for the year ended December 31, 2012, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2013, June 30, 2013, and September 30, 2013, 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 provides and administers health benefits to approximately 5.3 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. Through its subsidiaries, Health Net also offers behavioral health, substance abuse and employee assistance programs, managed health care products related to prescription drugs, 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 Health Net’s website at www.healthnet.com.

CAUTIONARY STATEMENTS

The company 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, including the guidance for future periods and the assumptions underlying such projections, 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, the guidance as to expected future period results and 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 taxation or regulation of health benefits and managed care operations, including but not limited to the implementation of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (collectively, the "ACA") and related fees, assessments and taxes; the company’s ability to successfully participate in California’s Coordinated Care Initiative, which is subject to a number of risks inherent in untested health care initiatives and requires the company to adequately predict the costs of providing benefits to individuals that are generally among the most chronically ill within each of Medicare and Medi-Cal and implement delivery systems for benefits with which the company has limited operating experience; the company’s ability to successfully participate in the federal and state health insurance exchanges under the ACA, which have experienced technical challenges in implementation and which involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of our premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs; our ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; the company’s ability to successfully participate in Arizona’s Medicaid program; trends in medical care ratios; membership declines or negative changes in our health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; the timing of collections on amounts receivable from state and federal governments and agencies, including collections of amounts owed under the T-3 contract; 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; changes in economic or market conditions including a further decline in the economy; failure to effectively oversee our third-party vendors; noncompliance by the company or the company’s business associates with any privacy laws or any security breach involving the misappropriation, loss or other unauthorized use or disclosure of confidential information; impairment of the company’s goodwill or other intangible assets; investment portfolio impairment charges; volatility in the financial markets; liabilities incurred in connection with the company’s divested operations; 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 the company’s most recent Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q filed with the SEC and the other risks discussed in the company’s filings with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements. Except as may be required by law, the company undertakes no obligation to address or publicly update any of its guidance, the assessment of the underlying assumptions or 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, 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, 2013.

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.

Ten pages of tables follow.
             

Health Net, Inc.

 

2014 GAAP Guidance(1)

 
             
 
MEMBERSHIP at 12/31/2014
Enrollment % Change
at 12/31/2014       from 12/31/2013

Commercial
Large Group

580,000

-11.0%
Small Group

300,000
-6.0%
Individual 270,000 135.0%
 
Total Commercial 1,150,000 6.0%
 
Medicare Advantage 260,000 7.0%
 
Medicaid 1,590,000 42.0%
 
Dual Eligibles 38,000 n/a
 
Total Health Plan Membership 3,040,000 24.0%
                 
 
Premium Revenues     FY2014
 
Commercial $5.4 billion
Medicare Advantage $3.0 billion
State Health Plans $5.1 billion
Dual Eligibles $342 million
Total Health Plans $13.8 billion
 
 
Total Consolidated Revenues $14.4 billion
 
 
Medical Care Ratios (MCR)     FY2014
 
Commercial 83.0%
Medicare Advantage 89.6%
Medicaid 85.2%
Dual Eligibles 86.9%
 
 
G&A Expense Ratio 10.8%
 
 

Tax Rate(2)
34.2%
 
 
Weighted-average fully
diluted shares outstanding

77 million
 

 

Earnings per Diluted Share (EPS)(2)
At least $3.00
                 
 

(1) All guidance metrics are approximations

(2) Includes a $60 million tax benefit
 
           
Health Net, Inc.
Enrollment Data - By State
(In thousands)
    Change from
September 30, 2013   December 31, 2012
December 31, September 30, December 31, Increase/ % Increase/ %
2013   2013   2012   (Decrease)   Change   (Decrease)   Change
California
Large Group 565 576 696 (11 ) (1.9 )% (131 ) (18.8 )%
Small Group and Individual 344   346   313   (2 )   (0.6 )%   31     9.9 %
Commercial Risk 909 922 1,009 (13 ) (1.4 )% (100 ) (9.9 )%
Medicare Advantage 153 149 145 4 2.7 % 8 5.5 %
Medi-Cal   1,113   1,126   1,084   (13 )   (1.2 )%   29     2.7 %
  Total California   2,175   2,197   2,238   (22 )   (1.0 )%   (63 )   (2.8 )%
 
Arizona
Large Group 57 59 82 (2 ) (3.4 )% (25 ) (30.5 )%
Small Group and Individual 51   54   59   (3 )   (5.6 )%   (8 )   (13.6 )%
Commercial Risk 108 113 141 (5 ) (4.4 )% (33 ) (23.4 )%
Medicare Advantage 43 43 43 0 0.0 % 0 0.0 %
Medicaid   4           4         4      
  Total Arizona   155   156   184   (1 )   (0.6 )%   (29 )   (15.8 )%
 
Northwest
Large Group 29 24 26 5 20.8 % 3 11.5 %
Small Group and Individual 39   42   57   (3 )   (7.1 )%   (18 )   (31.6 )%
Commercial Risk 68 66 83 2 3.0 % (15 ) (18.1 )%
Medicare Advantage   48   47   46   1     2.1 %   2     4.3 %
  Total Northwest   116   113   129   3     2.7 %   (13 )   (10.1 )%
 
                                 
Total Health Plan Enrollment
Large Group 651 659 804 (8 ) (1.2 )% (153 ) (19.0 )%
Small Group and Individual 434   442   429   (8 )   (1.8 )%   5     1.2 %
Commercial Risk 1,085 1,101 1,233 (16 ) (1.5 )% (148 ) (12.0 )%
Medicare Advantage 244 239 234 5 2.1 % 10 4.3 %
Medi-Cal/Medicaid 1,117   1,126   1,084   (9 )   (0.8 )%   33     3.0 %
Western Region Operations   2,446   2,466   2,551   (20 )   (0.8 )%   (105 )   (4.1 )%
 
 
TRICARE - North Contract Eligibles 2,851   2,865   2,883   (14 )   (0.5 )%   (32 )   (1.1 )%
 
             
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
    Change from
September 30, 2013   December 31, 2012
December 31, September 30, December 31, Increase/ % Increase/ %
2013   2013   2012   (Decrease)   Change   (Decrease)   Change
 
Large Group
California 565 576 696 (11 ) (1.9 )% (131 ) (18.8 )%
Arizona 57 59 82 (2 ) (3.4 )% (25 ) (30.5 )%
Northwest 29   24   26   5     20.8 %   3     11.5 %
651   659   804   (8 )   (1.2 )%   (153 )   (19.0 )%
 
Small Group and Individual
California 344 346 313 (2 ) (0.6 )% 31 9.9 %
Arizona 51 54 59 (3 ) (5.6 )% (8 ) (13.6 )%
Northwest 39   42   57   (3 )   (7.1 )%   (18 )   (31.6 )%
434   442   429   (8 )   (1.8 )%   5     1.2 %
 
Commercial Risk
California 909 922 1,009 (13 ) (1.4 )% (100 ) (9.9 )%
Arizona 108 113 141 (5 ) (4.4 )% (33 ) (23.4 )%
Northwest 68   66   83   2     3.0 %   (15 )   (18.1 )%
1,085   1,101   1,233   (16 )   (1.5 )%   (148 )   (12.0 )%
 
Medicare Advantage
California 153 149 145 4 2.7 % 8 5.5 %
Arizona 43 43 43 0 0.0 % 0 0.0 %
Northwest 48   47   46   1     2.1 %   2     4.3 %
244 239 234 5 2.1 % 10 4.3 %
 
Medi-Cal/Medicaid
California 1,113 1,126 1,084 (13 ) (1.2 )% 29 2.7 %
Arizona 4   0   0   4         4      
1,117 1,126 1,084 (9 ) (0.8 )% 33 3.0 %
 
                                 
Total Health Plan Enrollment
Large Group 651 659 804 (8 ) (1.2 )% (153 ) (19.0 )%
Small Group and Individual 434   442   429   (8 )   (1.8 )%   5     1.2 %
Commercial Risk 1,085 1,101 1,233 (16 ) (1.5 )% (148 ) (12.0 )%
Medicare Advantage 244 239 234 5 2.1 % 10 4.3 %
Medi-Cal/Medicaid 1,117   1,126   1,084   (9 )   (0.8 )%   33     3.0 %
Western Region Operations   2,446   2,466   2,551   (20 )   (0.8 )%   (105 )   (4.1 )%
 
 
TRICARE - North Contract Eligibles   2,851   2,865   2,883   (14 )   (0.5 )%   (32 )   (1.1 )%
 
 

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:   2013   2013   2012     2013   2012  
Health plan services premiums $ 2,559,376 $ 2,606,754 $ 2,640,533 $ 10,377,073 $ 10,459,098
Government contracts 148,470 149,342 161,700 572,266 689,121
Net investment income 11,643 11,276 19,078 69,613 82,434
Administrative services fees and other income 23,755 7,659 1,668 34,791 17,968
Divested operations and services revenue   -   -   14,803     -   40,471  
Total revenues   2,743,244   2,775,031   2,837,782     11,053,743   11,289,092  
 
EXPENSES:
Health plan services 2,229,332 2,196,561 2,332,811 8,886,547 9,316,313
Government contracts 124,709 125,334 137,543 502,918 605,074
General and administrative 279,339 267,683 251,483 1,083,694 939,940
Selling 63,600 59,498 64,921 239,428 245,925
Depreciation and amortization 10,234 9,402 8,424 38,589 31,146
Interest 7,988 7,973 8,325 32,614 33,220
Divested operations and services expense   -   -   25,851       85,824  
Total expenses   2,715,202   2,666,451   2,829,358     10,783,790   11,257,442  
Income from continuing operations before income taxes 28,042 108,580 8,424 269,953 31,650
Income tax provision   8,289   41,740   257     99,827   5,969  
Income from continuing operations   19,753   66,840   8,167     170,126   25,681  
 
Discontinued operation:
Loss from discontinued operation, net of tax - - - - (18,452 )

(Loss) gain on sale of discontinued operation, net of tax
  -   -   (2,156 )   -   114,834  
(Loss) gain on discontinued operation, net of tax   -   -   (2,156 )   -   96,382  
 
Net income $ 19,753 $ 66,840 $ 6,011   $ 170,126 $ 122,063  
 
Net income per share-basic:
Income from continuing operations $ 0.25 $ 0.84 $ 0.10 $ 2.14 $ 0.31
(Loss) income on discontinued operation, net of tax   -   -   (0.03 )   -   1.18  
Net income per share-basic $ 0.25 $ 0.84 $ 0.07   $ 2.14 $ 1.49  
 
Net income per share-diluted:
Income from continuing operations $ 0.25 $ 0.83 $ 0.10 $ 2.12 $ 0.31
(Loss) income on discontinued operation, net of tax   -   -   (0.03 )   -   1.16  
Net income per share-diluted $ 0.25 $ 0.83 $ 0.07   $ 2.12 $ 1.47  
 
Weighted average shares outstanding:
Basic 79,511 79,432 81,282 79,455 82,158
Diluted 80,600 80,441 82,111 80,404 83,112
 
 

Health Net, Inc.

Condensed Consolidated Balance Sheets

(Amounts in thousands, except ratio data)
         
December 31, September 30, December 31,
  2013     2013     2012  
ASSETS
Current Assets
Cash and cash equivalents $ 433,155 $ 686,139 $ 340,110
Investments - available for sale 1,567,020 1,580,032 1,812,512
Premiums receivable, net 430,012 343,502 373,269
Amounts receivable under government contracts 194,041 194,820 228,316
Other receivables 68,919 69,885 113,875
Deferred taxes 94,060 78,257 51,086
Other assets   132,683     103,685     130,796  
Total current assets 2,919,890 3,056,320 3,049,964
Property and equipment, net 201,395 195,954 183,793
Goodwill 565,886 565,886 565,886
Other intangible assets, net 13,842 14,699 17,271
Deferred taxes 5,793 3,394 13,583
Investments - available for sale - noncurrent 59,768 52,637 -
Other noncurrent assets   162,551     152,611     103,893  
Total Assets $ 3,929,125   $ 4,041,501   $ 3,934,390  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 984,075 $ 990,195 $ 1,037,973
Health care and other costs payable under government contracts 72,098 55,532 75,649
Unearned premiums 123,969 129,081 151,048
Accounts payable and other liabilities   397,036     544,704     373,426  
Total current liabilities 1,577,178 1,719,512 1,638,096
Senior notes payable 399,300 399,248 399,095
Deferred taxes 10,409 1,746 -
Borrowings under revolving credit facility 100,000 100,000 100,000
Other noncurrent liabilities   213,427     220,404     240,169  
Total Liabilities   2,300,314     2,440,910     2,377,360  
 
Stockholders' Equity
Common stock 150 150 149
Additional paid-in capital 1,377,624 1,370,744 1,329,000
Treasury common stock, at cost (2,179,744 ) (2,179,503 ) (2,092,625 )
Retained earnings 2,463,648 2,443,895 2,293,522
Accumulated other comprehensive (loss) income   (32,867 )   (34,695 )   26,984  
Total Stockholders' Equity   1,628,811     1,600,591     1,557,030  
Total Liabilities and Stockholders' Equity $ 3,929,125   $ 4,041,501   $ 3,934,390  
 
Debt-to-Total Capital Ratio 23.5 % 23.8 % 24.3 %
 
 
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,
  2013     2013     2012     2013     2012  
 
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,753 $ 66,840 $ 6,011 $ 170,126 $ 122,063
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Amortization and depreciation 10,234 9,402 8,424 38,589 31,146
Share-based compensation expense 6,542 6,511 5,480 29,930 28,893
Deferred income taxes (9,676 ) 5,573 (15,959 ) 8,645 8,924
Excess tax benefits from share-based compensation (169 ) (21 ) (30 ) (620 ) (6,089 )
Loss (gain) on sale of discontinued operation - - 2,156 - (114,834 )
Net realized gain on sale on investments (755 ) (370 ) (7,019 ) (24,061 ) (36,680 )
Other changes 7,975 8,040 8,326 31,539 15,158
Changes in assets and liabilities:
Premiums receivable and unearned premiums (91,622 ) 240,580 (39,611 ) (83,822 ) (212,998 )
Other current assets, receivables and noncurrent assets (24,528 ) (1,528 ) 49,829 1,425 (28,374 )
Amounts receivable/payable under government contracts (10,168 ) 2,013 (12,207 ) 20,896 (8,989 )
Reserves for claims and other settlements (6,120 ) (22,891 ) 50,321 (53,898 ) 164,306
Accounts payable and other liabilities   26,648     (11,954 )   22,249     (42,910 )   70,014  
Net cash (used in) provided by operating activities   (71,886 )   302,195     77,970     95,839     32,540  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 42,748 80,380 217,167 696,534 1,350,003
Maturities of investments 20,415 21,396 37,579 93,225 135,394
Purchases of investments (70,179 ) (92,602 ) (395,355 ) (722,223 ) (1,678,582 )
Proceeds from sale of property and equipment - - 24 - 24
Purchases of property and equipment (16,929 ) (15,831 ) (18,071 ) (59,525 ) (73,101 )
Net cash received from sale of business - - - - 248,238
Sales and purchases of restricted investments and other   (2,735 )   (2,108 )   (558 )   (7,432 )   5,466  
Net cash (used in) provided by investing activities   (26,680 )   (8,765 )   (159,214 )   579     (12,558 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 120 2,469 352 10,762 16,941
Repurchases of common stock (241 ) (105 ) (166 ) (77,810 ) (69,496 )
Excess tax benefits from share-based compensation 169 21 30 620 6,089
Borrowings under financing arrangements 22,000 - - 345,000 110,000
Repayment of borrowings under financing arrangements (22,000 ) (25,000 ) - (345,000 ) (122,500 )
Net increase (decrease) in checks outstanding, net of deposits - (99,394 ) 23,808 (23,842 ) 23,842
Customer funds administered   (154,466 )   235,100     84,751     86,897     124,999  
Net cash (used in) provided by financing activities   (154,418 )   113,091     108,775     (3,373 )   89,875  
 
Net (decrease) increase in cash and cash equivalents (252,984 ) 406,521 27,531 93,045 109,857
Cash and cash equivalents, beginning of period   686,139     279,618     312,579     340,110     230,253  
Cash and cash equivalents, end of period $ 433,155   $ 686,139   $ 340,110   $ 433,155   $ 340,110  
 
 
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 December 31, 2013 Quarter Ended September 30, 2013 Quarter Ended December 31, 2012

Western Region Operations1
 

Government Contracts2
 

Corporate/ Other3
  Consolidated

Western Region Operations1
 

Government Contracts2
 

Corporate/ Other3
  Consolidated

Western Region Operations1
 

Government Contracts2
 

Divested

Operations

and Services4
 

Corporate/

Other5
  Consolidated
 
Commercial premiums $ 1,271,553 $ 1,271,553 $ 1,279,834 $ 1,279,834 $ 1,395,473 $ 1,395,473
Medicare premiums 691,114 691,114 685,340 685,340 701,127 701,127
Medicaid premiums   596,709               596,709   641,580               641,580   543,933                   543,933
Health plan services premiums 2,559,376 2,559,376 2,606,754 2,606,754 2,640,533 2,640,533
Government contracts 148,470 148,470 149,342 149,342 161,700 161,700
Net investment income 11,643 11,643 11,276 11,276 19,078 19,078
Administrative services fees and other income 23,755 23,755 7,659 7,659 1,668 - 1,668
Divested operations and services revenue               -               -           14,803           14,803
Total revenues 2,594,774 148,470 2,743,244 2,625,689 149,342 2,775,031 2,661,279 161,700 14,803 2,837,782
 
Health plan services 2,229,332 2,229,332 2,196,561 2,196,561 2,327,791 - 5,020 2,332,811
Government contracts 124,638 71 124,709 125,841 (507 ) 125,334 138,478 (935 ) 137,543
G&A excluding insurance, taxes and fees 242,444 (1,044 ) 241,400 227,196 597 227,793 220,116 (304 ) 16,236 236,048
Insurance, taxes and fees   37,939               37,939   39,890               39,890   15,133           302           15,435
G&A including insurance, taxes and fees 280,383 (1,044 ) 279,339 267,086 597 267,683 235,249 (2 ) 16,236 251,483
Selling 63,600 63,600 59,498 59,498 64,921 64,921
Depreciation and amortization 10,234 10,234 9,402 9,402 8,424 8,424
Interest 7,988 7,988 7,973 7,973 8,325 8,325
Divested operations and services expense                                       25,851           25,851
Total expenses   2,591,537       124,638     (973 )     2,715,202   2,540,520       125,841     90       2,666,451   2,644,710       138,478     25,849       20,321       2,829,358
 
Income (loss) from continuing operations before income taxes 3,237 23,832 973 28,042 85,169 23,501 (90 ) 108,580 16,569 23,222 (11,046 ) (20,321 ) 8,424
Income tax provision (benefit)   (2,215 )     10,148     356       8,289   32,184       9,591     (35 )     41,740   1,463       9,324     (4,529 )     (6,001 )     257
Income (loss) from continuing operations $ 5,452     $ 13,684   $ 617     $ 19,753 $ 52,985     $ 13,910   $ (55 )   $ 66,840 $ 15,106     $ 13,898   $ (6,517 )   $ (14,320 )   $ 8,167
 
Basic earnings (loss) per share from continuing operations $ 0.07 $ 0.17 $ 0.01 $ 0.25 $ 0.67 $ 0.18 $ - $ 0.84 $ 0.19 $ 0.17 $ (0.08 ) $ (0.18 ) $ 0.10
Diluted earnings (loss) per share from continuing operations $ 0.07 $ 0.17 $ 0.01 $ 0.25 $ 0.66 $ 0.17 $ - $ 0.83 $ 0.18 $ 0.17 $ (0.08 ) $ (0.18 ) $ 0.10
 
Basic weighted average shares outstanding 79,511 79,511 79,511 79,511 79,432 79,432 79,432 79,432 81,282 81,282 81,282 81,282 81,282
Diluted weighted average shares outstanding 80,600 80,600 80,600 80,600 80,441 80,441 79,432 80,441 82,111 82,111 81,282 81,282 82,111
 
 
Pretax margin 0.1 % 3.2 % 0.62 %
Commercial premium yield 3.4 % 2.6 % 4.3 %
Commercial premium PMPM $ 388.41 $ 386.69 $ 375.65
Commercial health care cost trend 2.0 % -0.3 % 8.9 %
Commercial health care cost PMPM $ 339.53 $ 325.62 $ 332.86
Commercial MCR 87.4 % 84.2 % 88.6 %
Medicare Advantage MCR 90.5 % 89.9 % 87.4 %
Medicaid MCR 82.7 % 79.4 % 87.9 %
Health plan services MCR 87.1 % 84.3 % 88.2 %
G&A expense ratio 10.9 % 10.2 % 8.9 %
Selling costs ratio 2.5 % 2.3 % 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 litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.
 
4

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.

 
5

Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy. 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, 2013 Year Ended December 31, 2012

Western Region

Operations1
 

Government

Contracts2
 

Corporate/

Other3
  Consolidated

Western Region

Operations1
 

Government

Contracts2
 

Divested

Operations

and Services4
 

Corporate/

Other5
  Consolidated
 
Commercial premiums $ 5,175,370 $ 5,175,370 $ 5,705,497 $ 5,705,497
Medicare premiums 2,771,431 2,771,431 2,790,497 2,790,497
Medicaid premiums   2,430,272               2,430,272   1,963,104                   1,963,104
Health plan services premiums 10,377,073 10,377,073 10,459,098 - 10,459,098
Government contracts 572,266 572,266 689,121 689,121
Net investment income 69,613 69,613 82,434 82,434
Administrative services fees and other income 34,791 34,791 17,957 11 17,968
Divested operations and services revenue               -           40,471           40,471
Total revenues 10,481,477 572,266 - 11,053,743 10,559,489 689,121 40,482 - 11,289,092
Health plan services 8,886,547 8,886,547 9,316,922 174 (783 ) 9,316,313
Government contracts 497,780 5,138 502,918 599,211 5,863 605,074
G&A excluding insurance, taxes and fees 925,392 6,877 932,269 828,648 (1,445 ) 36,892 864,095
Insurance, taxes and fees   151,425               151,425   74,494           1,351           75,845
G&A including insurance, taxes and fees 1,076,817 6,877 1,083,694 903,142 (94 ) 36,892 939,940
Selling 239,428 239,428 245,925 245,925
Depreciation and amortization 38,589 38,589 31,145 1 31,146
Interest 32,614 32,614 33,220 33,220
Divested operations and services expense               -           85,824           85,824
Total expenses   10,273,995       497,780     12,015       10,783,790   10,530,354       599,211     85,905       41,972       11,257,442
 
Income (loss) from operations before income taxes 207,482 74,486 (12,015 ) 269,953 29,135 89,910 (45,423 ) (41,972 ) 31,650
Income tax provision (benefit)   73,621       30,900     (4,694 )     99,827   (1,034 )     35,777     (17,858 )     (10,916 )     5,969
Income (loss) from continuing operations $ 133,861     $ 43,586   $ (7,321 )   $ 170,126 $ 30,169     $ 54,133   $ (27,565 )   $ (31,056 )   $ 25,681
 
Basic earnings (loss) per share from continuing operations $ 1.69 $ 0.55 $ (0.09 ) $ 2.14 $ 0.37 $ 0.66 $ (0.34 ) $ (0.38 ) $ 0.31
Diluted earnings (loss) per share from continuing operations $ 1.67 $ 0.54 $ (0.09 ) $ 2.12 $ 0.36 $ 0.65 $ (0.34 ) $ (0.38 ) $ 0.31
 
Basic weighted average shares outstanding 79,455 79,455 79,455 79,455 82,158 82,158 82,158 82,158 82,158
Diluted weighted average shares outstanding 80,404 80,404 79,455 80,404 83,112 83,112 82,158 82,158 83,112
 
 
Pretax margin 2.0 % 0.3 %
Commercial premium yield 2.7 % 4.7 %
Commercial premium PMPM $ 385.13 $ 374.99
Commercial health care cost trend -1.0 % 9.1 %
Commercial health care cost PMPM $ 329.75 $ 333.17
Commercial MCR 85.6 % 88.8 %
Medicare Advantage MCR 90.6 % 89.3 %
Medicaid MCR 80.4 % 89.4 %
Health plan services MCR 85.6 % 89.1 %
G&A expense ratio 10.3 % 8.6 %
Selling costs ratio 2.3 % 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. For the year ended December 31, 2012, 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 litigation reserve true-up related to previous accrual for lawsuit and related legal expenses. Also includes severance expense.
 
4

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.
 
5

Includes legal expenses and litigation reserve true-ups related to previous accruals for lawsuits. Includes costs related to the company’s G&A cost reduction efforts and/or operations strategy. 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.
 
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. 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 2013 Q3 2013 Q4 2012 FY 2013 FY 2012
(1) Reserve for Claims and Other Settlements - GAAP $ 984.1 $ 990.2 $ 1,038.0 $ 984.1 $ 1,038.0
Less: Capitation, Provider and Other Claim Settlements, and MAPD Payables   (93.9 )   (80.1 )   (105.0 )   (93.9 )   (105.0 )
(2) Reserve for Claims and Other Settlements - Adjusted $ 890.2 $ 910.1 $ 933.0 $ 890.2 $ 933.0
 
(3) Health Plan Services Cost - GAAP $ 2,229.3 $ 2,196.6 $ 2,332.8 $ 8,886.5 $ 9,316.3
Less: Capitation, Provider and Other Claim Settlements, and MAPD Costs   (815.0 )   (827.3 )   (861.0 )   (3,348.9 )   (3,386.3 )
(4) Health Plan Services Cost - Adjusted $ 1,414.3 $ 1,369.3 $ 1,471.8 $ 5,537.6 $ 5,930.0
 
(5) Number of Days in Period 92 92 92 365 366
 
= (1) / (3) * (5) Days Claims Payable - GAAP Basis (using end of period reserve amount) 40.6 41.5 40.9 40.4 40.8
= (2) / (4) * (5) Days Claims Payable - Adjusted Basis (using end of period reserve amount) 57.9 61.1 58.3 58.7 57.6
 
 
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
     
Health Plan Services
FY 2013   FY 2012   FY 2011
 
Reserve for claims (a), beginning of period $ 808.7 $ 720.8 $ 727.5
Incurred claims related to:
Current Year (f) 4,666.0 4,950.9 4,733.0
Prior Years (c)   (56.2 )     34.5     (96.5 )
Total Incurred (b) 4,609.8 4,985.4 4,636.5
 
Paid claims related to:
Current Year 3,872.5 4,156.6 4,024.4
Prior Years   738.6       740.9     618.8  
Total Paid (b)   4,611.1       4,897.5     4,643.2  
 
 
Reserve for claims (a), end of period 807.4 808.7 720.8
Add:
Claims Payable (d) 67.0 91.6 111.0
Other (e) 109.7 137.7 80.3
         
 
Reserves for claims and other settlements, end of period $ 984.1     $ 1,038.0   $ 912.1  
 
 
 
(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. Negative amounts in this line represent favorable development in estimated prior years' health care costs. Positive amounts in this line represent unfavorable development in estimated prior years' health care costs. The favorable development related to prior years that was recorded in the twelve months ended December 31, 2013 and in 2011 resulted from claims being settled for amounts less than originally estimated. In 2013, this was primarily due to the absence of moderately adverse conditions. In 2011, this was primarily due to lower than expected health care cost trends. The favorable developments related to prior years that were recorded in 2013 and 2011 do not directly correspond to an increase in our operating results for those periods because any favorable prior period reserve development increases current period net income only to the extent that the current period provision for adverse deviation (see footnote (f)) is less than the benefit recognized from the prior period favorable development. The unfavorable development in estimated prior years' health care costs for 2012 primarily resulted from significant delays in claims submissions for the fourth quarter of 2011 arising from issues related to a new billing format required by HIPAA combined with an unanticipated flattening of commercial trends.
 
(d) Includes amount accrued for litigation and regulatory-related expenses.
 
(e) Includes accrued capitation, shared risk settlements, provider incentives and other reserve items.
 
(f) Our IBNR estimate also includes a provision for adverse deviation, which is an estimate for known environmental factors that are reasonably likely to affect the required level of IBNR reserves. Such amounts were $53 million, $53 million and $48 million as of December 31, 2013, December 31, 2012, and December 31, 2011, respectively.
 

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