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Health Net Reports Third Quarter 2015 Results

Company Reports GAAP Net Income of $60.3 Million, or $0.77 per Diluted Share

Western Region Operations and Government Contracts Segments Produce Combined Net Income of $0.96 per Diluted Share in Third Quarter of 2015

Consolidated MCR Improves to 83.4 Percent in Third Quarter of 2015

Monday, November 2, 2015 6:00 am PST

Dateline:

LOS ANGELES

Public Company Information:

NYSE:
HNT
"Operating cash flow in the third quarter of 2015 was negatively impacted by a $123 million net disbursement for ACA-related programs, including payment of the health insurer fee and net settlements for the ACA's risk adjustment and reinsurance programs for the year 2014"

LOS ANGELES--(BUSINESS WIRE)--Health Net, Inc. (NYSE:HNT) today announced 2015 third quarter GAAP net income of $60.3 million, or $0.77 per diluted share, compared with a GAAP net loss of $8.9 million, or a loss of $0.11 per share, for the third quarter of 2014 and GAAP net income of $58.4 million, or $0.75 per diluted share, for the second quarter of 2015.

In the third quarter of 2015, Health Net incurred $21.7 million of pretax expenses primarily as a result of information technology costs associated with the suspension of the previously announced transaction with a wholly owned subsidiary of Cognizant Technology Solutions Corporation (Cognizant). In addition, this amount includes $5.2 million of pretax expenses related to the company's previously announced definitive merger agreement with Centene Corporation (Centene). Efforts toward the commencement of services pursuant to the Cognizant transaction were suspended in connection with Health Net’s July 2, 2015 announcement that it had entered into a definitive merger agreement with Centene (see Recent Events).

The company’s Western Region Operations (Western Region) and Government Contracts segments produced combined net income of $75.1 million, or $0.96 per diluted share, in the third quarter of 2015 compared with $58.5 million, or $0.72 per diluted share, in the third quarter of 2014 and $74.6 million, or $0.95 per diluted share, in the second quarter of 2015.

RECENT EVENTS

On July 2, 2015, Health Net announced that it had entered into a definitive merger agreement with Centene under which Centene will acquire all of the issued and outstanding shares of Health Net, subject to the terms and conditions of the merger agreement.

Centene and Health Net received early termination of the waiting period required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 on August 11, 2015.

On October 23, 2015, Health Net's stockholders voted to approve the adoption of the merger agreement with Centene. On the same date, Centene’s stockholders voted to approve the issuance of Centene common stock to stockholders of Health Net in connection with Centene’s pending merger with Health Net.

Health Net continues to expect that the transaction will close in early 2016, subject to receipt of required regulatory approvals and satisfaction of other customary closing conditions.

2015 GUIDANCE

Health Net is lowering GAAP earnings per diluted share guidance from $2.70 to $2.50 for the full year 2015. This adjustment primarily reflects third quarter expenses that were incurred as a result of information technology costs in connection with the suspension of the Cognizant transaction as well as costs related to the pending merger transaction with Centene. Health Net is maintaining diluted EPS guidance for the combined Western Region and Government Contracts segments at a range of $3.25 to $3.35 for the full year 2015.

GAAP diluted EPS guidance and diluted EPS guidance for the combined Western Region and Government Contracts segments for the full year 2015 do not include expected fourth quarter 2015 costs associated with the pending merger transaction with Centene or expected fourth quarter 2015 expenses due to the suspension of the Cognizant transaction.

THIRD QUARTER 2015 HIGHLIGHTS

Highlights from the third quarter of 2015 include:

1. Health Net's total revenues grew 9.6 percent in the third quarter of 2015 compared with the third quarter of 2014, and health plan services premiums revenues rose 9.5 percent over the same period;

2. Combined net income for Health Net's Western Region and Government Contracts segments rose 28.3 percent in the third quarter of 2015 compared with the third quarter of 2014;

3. The company's Western Region pretax margin increased 140 basis points to 4.3 percent in the third quarter of 2015 compared with the third quarter of 2014 and increased 50 basis points compared with the second quarter of 2015;

4. Enrollment in the company's Western Region health plans grew by 6.4 percent to 3.3 million members as of September 30, 2015 compared with 3.1 million members as of September 30, 2014, and increased by 1.0 percent compared with 3.2 million members as of June 30, 2015;

5. Total Medicaid enrollment increased by 17.8 percent, or 279,000 members, to 1.8 million members as of September 30, 2015 compared with September 30, 2014, and rose by 3.1 percent, or 56,000 members, compared with June 30, 2015; and

6. Health Net's Western Region health plan services Medical Care Ratio (MCR) improved by 210 basis points year-over-year to 83.4 percent in the third quarter of 2015 and improved by 60 basis points sequentially compared with the second quarter of 2015.

“The third quarter of 2015 continued our positive momentum that we expected for this year,” said Jay Gellert, Health Net's president and chief executive officer. “We will remain focused on a disciplined execution of our strategy while we work to complete the Centene merger transaction.”

CONSOLIDATED RESULTS

Health Net’s total revenues increased 9.6 percent in the third quarter of 2015 to $4.2 billion from $3.8 billion in the third quarter of 2014 and were essentially flat compared with the second quarter of 2015. The year-over-year increase in total revenues was primarily due to an increase in enrollment in the company’s Western Region health plans. Health plan services premiums revenues were approximately $4.0 billion in the third quarter of 2015, an increase of 9.5 percent compared with the third quarter of 2014.

Total expenses increased 6.2 percent in the third quarter of 2015 to $4.0 billion from $3.8 billion in the third quarter of 2014 and were essentially flat compared with the second quarter of 2015. Health plan services expenses increased by 6.9 percent to approximately $3.3 billion in the third quarter of 2015 compared with the third quarter of 2014.

Included in total expenses are $21.7 million, $26.4 million and $47.3 million of expenses primarily related to the transaction with Cognizant for the three months ended September 30, 2015, June 30, 2015 and March 31, 2015, respectively. With respect to the third quarter of 2015, these expenses were primarily information technology expenses associated with the suspension of the Cognizant transaction. In addition, these expenses in the third quarter of 2015 include $5.2 million of pretax expenses related to Health Net's definitive merger agreement with Centene.

Western Region Health Plan Services

Health plan services premiums revenues in the Western Region of $4.0 billion in the third quarter of 2015 increased by 9.5 percent compared with $3.6 billion in the third quarter of 2014, primarily due to enrollment growth from Medicaid expansion.

Health plan services expenses in the company's Western Region of $3.3 billion in the third quarter of 2015 increased by 6.9 percent compared with $3.1 billion in the third quarter of 2014, primarily as a result of enrollment growth from Medicaid expansion.

Government Contracts Segment

Government Contracts revenues in the third quarter of 2015 were $160.7 million compared with $146.2 million in the third quarter of 2014 and $141.1 million in the second quarter of 2015. The increase in Government Contracts revenues in the third quarter of 2015 was primarily due to increased revenues from the Department of Veterans Affairs (VA) Patient-Centered Community Care (PC3) program.

Government Contracts expenses in the third quarter of 2015 were $158.2 million compared with $123.6 million in the third quarter of 2014 and $137.2 million in the second quarter of 2015.

As a result of the expedited implementation of the PC3 program, the company experienced higher-than-expected costs in the third quarter of 2015. In total, the company expects to spend approximately $40 million in ramp-up costs in 2015 which are not expected to recur in 2016.

As previously reported, the VA notified Health Net on July 27, 2015 of its intent to exercise option period two for the PC3 program. This one-year option period commenced on October 1, 2015, and continues the health care services provided to veterans in all or portions of 37 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.

On July 23, 2015, Health Net responded to the U.S. Department of Defense’s (DoD) request for proposal for the next generation TRICARE contract which will reduce the three existing TRICARE regions to two regions. In March 2015, the DoD modified the company's T-3 contract for the TRICARE North Region to add three additional one-year option periods and awarded Health Net the first of the three option periods, which allows the company to continue providing access to health care services to TRICARE beneficiaries through March 31, 2016.

WESTERN REGION OPERATIONS SEGMENT

Health Plan Membership

Total enrollment in the Western Region at September 30, 2015 was approximately 3.3 million members, an increase of 6.4 percent from enrollment at September 30, 2014, and an increase of 1.0 percent from June 30, 2015.

Total enrollment in the company’s California health plans at September 30, 2015 was approximately 2.9 million members, an increase of 10.2 percent from enrollment at September 30, 2014, and an increase of 1.8 percent from enrollment at June 30, 2015.

Western Region commercial enrollment at September 30, 2015 was approximately 1.1 million, a decrease of 7.7 percent compared with enrollment at September 30, 2014, and a decrease of 1.9 percent compared with June 30, 2015. The year-over-year decrease was primarily due to membership decreases in the company's large group business in California and individual business in Arizona.

Membership in tailored network products represented 54.9 percent of the company’s Western Region commercial membership at September 30, 2015, a 320 basis point increase compared with 51.7 percent at September 30, 2014, and up 20 basis points compared with 54.7 percent at June 30, 2015.

Enrollment in the company’s Medicare Advantage (MA) plans at September 30, 2015 was 270,000 members, essentially flat when compared with enrollment of 271,000 members at September 30, 2014 and 269,000 members at June 30, 2015.

Medicaid enrollment increased 17.8 percent to approximately 1.8 million members at September 30, 2015 compared with approximately 1.6 million members at September 30, 2014, and increased 3.1 percent compared with June 30, 2015. These increases are primarily due to Medicaid expansion under the Affordable Care Act (ACA).

In the third quarter of 2015, enrollment increased year-over-year in each of the three health plan categories for members who are dually eligible for both Medicare and Medicaid.

  • In MA plans for dually-eligible members, enrollment was approximately 28,000 members in Los Angeles and San Diego counties at September 30, 2015 compared with approximately 27,000 at September 30, 2014 and June 30, 2015.
  • Membership in the company's managed long-term services and supports (LTSS) program in these demonstration counties was approximately 120,000 at September 30, 2015 compared with approximately 37,000 at September 30, 2014 and compared with approximately 112,000 at June 30, 2015.
  • Enrollment in Health Net's dual eligible demonstration project (Cal MediConnect) was 24,000 at September 30, 2015, an increase of 15,000 members compared with enrollment of 9,000 at September 30, 2014, and a decrease of 11.1 percent, or 3,000 members, compared with dual eligible enrollment at June 30, 2015.

As of October 1, 2015, Health Net administered benefits to 42 percent of the Cal MediConnect enrollment in Los Angeles County and 20 percent of the enrollment in San Diego County. Enrollment in this line of business continued to be challenged by higher-than-expected opt-out rates during the third quarter of 2015.

Investment Income

Net investment income for the Western Region was $13.9 million in the third quarter of 2015 compared with $11.0 million in the third quarter of 2014 and $16.4 million in the second quarter of 2015.

Western Region Operations Premiums

Western Region premiums per member per month (PMPM) increased by 1.2 percent to approximately $406 in the third quarter of 2015 compared with approximately $401 in the third quarter of 2014.

Western Region Health Care Cost Trends and Medical Care Ratio (MCR)

Health care costs PMPM for the Western Region decreased by 1.2 percent to approximately $338 in the third quarter of 2015 compared with approximately $343 in the third quarter of 2014.

“Consistent with the first half of 2015, health care cost trends remained moderate and within expectations in the third quarter,” said James Woys, Health Net's chief financial and operating officer. “This has helped lead to a continued improvement in the company's consolidated medical care ratio.”

The Western Region health plan services consolidated MCR was 83.4 percent in the third quarter of 2015 compared with 85.5 percent in the third quarter of 2014 and 84.0 percent in the second quarter of 2015, representing an improvement of 210 basis points year-over-year and 60 basis points sequentially. The improvement is primarily due to better performance in the company's Medicaid business.

General and Administrative (G&A) Expenses

G&A expenses in the Western Region were $420.6 million in the third quarter of 2015 compared with $353.4 million in the third quarter of 2014 and $422.6 million in the second quarter of 2015. The G&A expense ratio was 10.6 percent in the third quarter of 2015 compared with 9.7 percent in the third quarter of 2014 and 10.5 percent in the second quarter of 2015.

Health Net's administrative expense ratio was 6.8 percent in the third quarter of 2015, a 20 basis point increase compared with the third quarter of 2014 and a 10 basis point decrease compared with the second quarter of 2015. The administrative expense ratio does not include premium taxes and ACA-related fees.

BALANCE SHEET

Cash and investments as of September 30, 2015 were approximately $3.2 billion compared with approximately $2.8 billion as of September 30, 2014.

Reserves for claims and other settlements were $1.7 billion as of September 30, 2015 compared with $1.7 billion as of September 30, 2014 and $1.8 billion as of June 30, 2015.

Days claims payable (DCP) for the third quarter of 2015 was 46.7 days compared with 51.4 days in the third quarter of 2014 and 47.6 days in the second quarter of 2015.

On an adjusted1 basis, DCP for the third quarter of 2015 was 63.4 days compared with 65.3 days in the third quarter of 2014 and 59.1 days in the second quarter of 2015. Adjusted DCP met expectations for the third quarter of 2015. Adjusted DCP for the second quarter of 2015 was lower, primarily due to the payment of provider risk sharing and incentive programs.

The company’s debt-to-total capital ratio was 25.4 percent as of September 30, 2015 compared with 22.1 percent as of September 30, 2014 and 26.3 percent as of June 30, 2015.

CASH FLOW FROM OPERATIONS

Operating cash flow was negative $30.7 million in the third quarter of 2015.

“Operating cash flow in the third quarter of 2015 was negatively impacted by a $123 million net disbursement for ACA-related programs, including payment of the health insurer fee and net settlements for the ACA's risk adjustment and reinsurance programs for the year 2014,” noted Woys.

The company noted that cash at the parent was $100.9 million at September 30, 2015.

STOCK REPURCHASE UPDATE

Health Net did not repurchase any shares of its common stock in the third quarter of 2015. At September 30, 2015, approximately $306 million of authorization under the company’s existing $400 million stock repurchase program remained.

The company's stock repurchase program is suspended for the balance of 2015 as a result of Health Net's pending merger agreement with Centene.

1See “Disclosures Regarding Non-GAAP Financial Information” attached to this press release for a reconciliation of this information to the comparable GAAP financial measure.

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 6.1 million individuals across the country through group, individual, Medicare (including the Medicare prescription drug benefit commonly referred to as “Part D”), Medicaid and dual eligible programs, as well as programs with the U.S. Department of Defense and U.S. Department of Veterans Affairs. Health Net also offers behavioral health, substance abuse and employee assistance programs, and managed health care products related to prescription drugs.

For more information on Health Net, Inc., please visit the company’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 a number of factors, variables or events. Certain of these factors relate to the company’s proposed business combination with Centene Corporation (“Centene”), including, among other things, the expected closing date of the transaction; the possibility that the expected synergies and value creation from the proposed merger will not be realized, or will not be realized within the expected time period, including as a result of conditions, terms, obligations or restrictions imposed by regulators in connection with their approval of or consent to the merger; the risk that the businesses will not be integrated successfully; disruption from the merger making it more difficult to maintain business and operational relationships; the risk that unexpected costs will be incurred; the possibility that the merger does not close, including, but not limited to, due to the failure to satisfy the closing conditions; the risk that financing for the transaction may not be available on favorable terms; and certain other risks associated with the merger, as more fully discussed in the definitive joint proxy statement/prospectus that was filed with the SEC on September 21, 2015, in connection with the merger. Other factors include, among others, 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, and subsequent modifications to, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 and the regulations promulgated thereunder (collectively, the “ACA”) as well as any 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 involve uncertainties related to the mix and volume of business that could negatively impact the adequacy of the company’s premium rates and may not be sufficiently offset by the risk apportionment provisions of the ACA; increasing health care costs, including but not limited to costs associated with the introduction of new treatments or therapies; the company’s ability to reduce administrative expenses while maintaining targeted levels of service and operating performance; the recompetition of the company’s T-3 contract for the TRICARE North region; negative prior period claims reserve developments; rate cuts and other risks and uncertainties affecting the company’s Medicare or Medicaid businesses; trends in medical care ratios; membership declines or negative changes in the company’s health care product mix; unexpected utilization patterns or unexpectedly severe or widespread illnesses; failure to effectively oversee the company’s 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; the timing of collections on amounts receivable from state and federal governments and agencies; litigation costs; regulatory issues with federal and state agencies including, but not limited to, the California Department of Managed Health Care and Department of Health Care Services, the Arizona Health Care Cost Containment System, 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 political, economic or market conditions; investment portfolio impairment charges; volatility in the financial markets; and general business and market conditions. The factors described in the context of such forward-looking statements in this press release could cause the company or Centene’s plans with respect to the proposed merger, actual results, performance or achievements, industry results and developments to differ materially from those expressed in or implied by such forward-looking statements. 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 as a result of subsequent events or adjustments, if any, arising prior to the filing of the company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2015.

 
Health Net, Inc.
Enrollment Data - By State
(In thousands)
                        Change from
June 30, 2015       September 30, 2014
September 30, June 30, September 30, Increase/       %       Increase/       %
2015       2015       2014       (Decrease)       Change       (Decrease)       Change
California
Large Group 450 444 477 6 1.4 % (27 ) (5.7 )%
Small Group 236 241 243 (5 ) (2.1 )% (7 ) (2.9 )%
Individual 267       279       269       (12 )       (4.3 )%       (2 )       (0.7 )%
Commercial 953 964 989 (11 ) (1.1 )% (36 ) (3.6 )%
Medicare Advantage 168 168 169 0 0.0 % (1 ) (0.6 )%
Medi-Cal 1,777 1,712 1,485 65 3.8 % 292 19.7 %
Dual Eligibles       24       27       9       (3 )       (11.1 )%       15         166.7 %
Total California       2,922       2,871       2,652       51         1.8 %       270         10.2 %
 
Arizona
Large Group 32 36 45 (4 ) (11.1 )% (13 ) (28.9 )%
Small Group 36 37 44 (1 ) (2.7 )% (8 ) (18.2 )%
Individual 65       69       97       (4 )       (5.8 )%       (32 )       (33.0 )%
Commercial 133 142 186 (9 ) (6.3 )% (53 ) (28.5 )%
Medicare Advantage 38 38 46 0 0.0 % (8 ) (17.4 )%
Medicaid       67       76       80       (9 )       (11.8 )%       (13 )       (16.3 )%
Total Arizona       238       256       312       (18 )       (7.0 )%       (74 )       (23.7 )%
 
Northwest
Large Group 25 27 28 (2 ) (7.4 )% (3 ) (10.7 )%
Small Group 22 22 23 0 0.0 % (1 ) (4.3 )%
Individual 2       2       4       0         0.0 %       (2 )       (50.0 )%
Commercial 49 51 55 (2 ) (3.9 )% (6 ) (10.9 )%
Medicare Advantage       64       63       56       1         1.6 %       8         14.3 %
Total Northwest       113       114       111       (1 )       (0.9 )%       2         1.8 %
 
                                                         
Total Health Plan Enrollment
Large Group 507 507 550 0 0.0 % (43 ) (7.8 )%
Small Group 294 300 310 (6 ) (2.0 )% (16 ) (5.2 )%
Individual 334       350       370       (16 )       (4.6 )%       (36 )       (9.7 )%
Commercial 1,135 1,157 1,230 (22 ) (1.9 )% (95 ) (7.7 )%
Medicare Advantage 270 269 271 1 0.4 % (1 ) (0.4 )%
Medi-Cal/Medicaid 1,844 1,788 1,565 56 3.1 % 279 17.8 %
Dual Eligibles 24       27       9       (3 )       (11.1 )%       15         166.7 %
Western Region Operations       3,273       3,241       3,075       32         1.0 %       198         6.4 %
 
 
TRICARE - North Contract Eligibles       2,829       2,829       2,849       0         0.0 %       (20 )       (0.7 )%
 
 
Health Net, Inc.
Enrollment Data - Line of Business
(In thousands)
                        Change from
June 30, 2015       September 30, 2014
September 30, June 30, September 30, Increase/       %       Increase/       %
2015       2015       2014       (Decrease)       Change       (Decrease)       Change
 
Large Group
California 450 444 477 6 1.4 % (27 ) (5.7 )%
Arizona 32 36 45 (4 ) (11.1 )% (13 ) (28.9 )%
Northwest 25       27       28       (2 )      

(7.4

)%       (3 )       (10.7 )%
507       507       550       0         0.0 %       (43 )       (7.8 )%
 
Small Group
California 236 241 243 (5 ) (2.1 )% (7 ) (2.9 )%
Arizona 36 37 44 (1 ) (2.7 )% (8 ) (18.2 )%
Northwest 22       22       23       0         0.0 %       (1 )       (4.3 )%
294       300       310       (6 )       (2.0 )%       (16 )       (5.2 )%
 
Individual
California 267 279 269 (12 ) (4.3 )% (2 ) (0.7 )%
Arizona 65 69 97 (4 ) (5.8 )% (32 ) (33.0 )%
Northwest 2       2       4       0         0.0 %       (2 )       (50.0 )%
334       350       370       (16 )       (4.6 )%       (36 )       (9.7 )%
 
Commercial
California 953 964 989 (11 ) (1.1 )% (36 ) (3.6 )%
Arizona 133 142 186 (9 ) (6.3 )% (53 ) (28.5 )%
Northwest 49       51       55       (2 )       (3.9 )%       (6 )       (10.9 )%
1,135       1,157       1,230       (22 )       (1.9 )%       (95 )       (7.7 )%
 
Medicare Advantage
California 168 168 169 0 0.0 % (1 ) (0.6 )%
Arizona 38 38 46 0 0.0 % (8 ) (17.4 )%
Northwest 64       63       56       1         1.6 %       8         14.3 %
270       269       271       1         0.4 %       (1 )       (0.4 )%
 
Medi-Cal/Medicaid
California 1,777 1,712 1,485 65 3.8 % 292 19.7 %
Arizona 67       76       80       (9 )       (11.8 )%       (13 )       (16.3 )%
1,844       1,788       1,565       56         3.1 %       279         17.8 %
 
Dual Eligibles                                                  
California 24       27       9       (3 )       (11.1 )%       15         166.7 %
                                                         
Total Health Plan Enrollment
Large Group 507 507 550 0 0.0 % (43 ) (7.8 )%
Small Group 294 300 310 (6 ) (2.0 )% (16 ) (5.2 )%
Individual 334       350       370       (16 )       (4.6 )%       (36 )       (9.7 )%
Commercial 1,135 1,157 1,230 (22 ) (1.9 )% (95 ) (7.7 )%
Medicare Advantage 270 269 271 1 0.4 % (1 ) (0.4 )%
Medi-Cal/Medicaid 1,844 1,788 1,565 56 3.1 % 279 17.8 %
Dual Eligibles 24       27       9       (3 )       (11.1 )%       15         166.7 %
Western Region Operations       3,273       3,241       3,075       32         1.0 %       198         6.4 %
 
 
TRICARE - North Contract Eligibles       2,829       2,829       2,849       0         0.0 %       (20 )       (0.7 )%
 
 
Health Net, Inc.
Consolidated Statements of Operations
($ in thousands, except per share data)
 
      Quarter Ended       Quarter Ended       Quarter Ended
September 30, June 30, September 30,
REVENUES: 2015 2015 2014
Health plan services premiums $ 3,977,891 $ 4,003,432 $ 3,631,617
Government contracts 160,661 141,055 146,183
Net investment income 13,915 16,424 10,964
Administrative services fees and other income   1,200   2,712   1,106  
Total revenues   4,153,667   4,163,623   3,789,870  
 
EXPENSES:
Health plan services 3,318,415 3,363,742 3,104,010
Government contracts 158,124 137,262 124,403
General and administrative 442,326 448,713 373,623
Selling 66,155 69,190 66,111
Depreciation and amortization 6,882 4,202 6,500
Interest 8,417 8,412 7,810
Asset impairment       84,690  
Total expenses   4,000,319   4,031,521   3,767,147  
Income from operations before income taxes 153,348 132,102 22,723
Income tax provision   93,095   73,734   31,662  
Net income (loss) $ 60,253 $ 58,368 $ (8,939 )
 
Net income (loss) per share:
Basic $ 0.78 $ 0.76 $ (0.11 )
Diluted $ 0.77 $ 0.75 $ (0.11 )
 
Weighted average shares outstanding:
Basic 77,288 77,172 80,235
Diluted 78,405 78,157 80,235
 
 
Health Net, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except ratio data)
 
      September 30,       June 30,       September 30,
2015 2015 2014
ASSETS
Current Assets
Cash and cash equivalents $ 972,908 $ 756,797 $ 1,114,558
Investments - available for sale 2,221,278 2,371,540 1,664,830
Premiums receivable, net 832,785 434,067 579,515
Amounts receivable under government contracts 165,073 223,160 143,662
Other receivables 430,987 459,090 307,369
Deferred taxes 76,495 62,983 71,434
Assets held for sale 50,000 50,000
Other assets   309,543     501,200     157,066  
Total current assets 5,009,069 4,858,837 4,088,434
Property and equipment, net 139,083 80,816 92,193
Goodwill 558,886 558,886 558,886
Other intangible assets, net 9,712 10,415 12,526
Deferred taxes 16,520 43,588 34,580
Investments - available for sale - noncurrent 20,064 6,544 3,055
Other noncurrent assets   270,097     300,572     173,230  
Total Assets $ 6,023,431   $ 5,859,658   $ 4,962,904  
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Reserves for claims and other settlements $ 1,684,423 $ 1,757,939 $ 1,733,307
Health care and other costs payable under government contracts 56,417 75,092 62,796
Unearned premiums 121,061 190,021 125,363
Accounts payable and other liabilities   1,486,133     1,168,014     540,968  
Total current liabilities 3,348,034 3,191,066 2,462,434
Senior notes payable 399,658 399,607 399,453
Deferred taxes
Borrowings under revolving credit facility 210,000 210,000 100,000
Other noncurrent liabilities   277,922     346,915     235,393  
Total Liabilities   4,235,614     4,147,588     3,197,280  
 
Stockholders' Equity
Common stock 154 154 152
Additional paid-in capital 1,489,532 1,481,691 1,432,513
Treasury common stock, at cost (2,454,067 ) (2,453,869 ) (2,272,180 )
Retained earnings 2,757,886 2,697,633 2,604,363
Accumulated other comprehensive (loss) income   (5,688 )   (13,539 )   776  
Total Stockholders' Equity   1,787,817     1,712,070     1,765,624  
Total Liabilities and Stockholders' Equity $ 6,023,431   $ 5,859,658   $ 4,962,904  
 
Debt-to-Total Capital Ratio 25.4 % 26.3 % 22.1 %
 
 
Health Net, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
 
      Quarter Ended       Quarter Ended       Quarter Ended
September 30, June 30, September 30,
2015 2015 2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 60,253 $ 58,368 $ (8,939 )

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

Amortization and depreciation 6,882 4,202 6,500
Share-based compensation expense 7,724 7,067 6,109
Deferred income taxes 9,289 2,691 (38,231 )
Excess tax benefits from share-based compensation (74 ) (1,653 ) (241 )
Asset impairment 84,690
Net realized gain on sale on investments 82 (1,564 ) (346 )
Other changes 9,210 12,296 7,264
Changes in assets and liabilities:
Premiums receivable and unearned premiums (467,678 ) (105,357 ) 264,032
Other current assets, receivables and noncurrent assets 136,889 (128,040 ) (34,671 )
Amounts receivable/payable under government contracts 30,893 2,439 12,369
Reserves for claims and other settlements (73,516 ) (155,839 ) 244,985
Accounts payable and other liabilities   249,365     45,115     44,434  
Net cash (used in) provided by operating activities   (30,681 )   (260,275 )   587,955  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of investments 342,013 447,939 104,628
Maturities of investments 23,911 24,393 21,064
Purchases of investments (110,065 ) (517,529 ) (133,014 )
Purchases of property and equipment (17,731 ) (19,108 ) (18,439 )
Sales and purchases of restricted investments and other   2,176     1,258     2,002  

Net cash provided by (used in) investing activities

  240,304     (63,047 )   (23,759 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and employee stock purchases 2,008 6,860 14,945
Repurchases of common stock (161 ) (298 ) (57,168 )
Excess tax benefits from share-based compensation 74 1,653 241
Borrowings under financing arrangements 15,000 95,000
Repayment of borrowings under financing arrangements (15,000 ) (80,000 )

Net (decrease) increase in checks outstanding, net of deposits

(8,230 ) 8,230
Customer funds administered   12,797     30,321     (10,753 )
Net cash provided by (used in) financing activities   6,488     61,766     (52,735 )
 

Net increase (decrease) in cash and cash equivalents

216,111 (261,556 ) 511,461
Cash and cash equivalents, beginning of period   756,797     1,018,353     603,097  
Cash and cash equivalents, end of period $ 972,908   $ 756,797   $ 1,114,558  
 
 
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 September 30, 2015     Quarter Ended June 30, 2015     Quarter Ended September 30, 2014

Western

     

Western

     

Western

     

Region

Government Corporate/

Region

Government Corporate/

Region

Government Corporate/

Operations1

 

Contracts2

 

Other3

  Consolidated Operations1Contracts2Other4Consolidated

Operations1

  Contracts2   Other5   Consolidated
 
Commercial premiums $ 1,412,264 $ 1,412,264 $ 1,412,920 $ 1,412,920 $ 1,430,769 $ 1,430,769
Medicare premiums 778,237 778,237 782,412 782,412 763,327 763,327
Medicaid premiums 1,668,091 1,668,091 1,673,083 1,673,083 1,397,732 1,397,732
Dual Eligibles premiums   119,299               119,299   135,017               135,017   39,789               39,789  
Health plan services premiums 3,977,891 3,977,891 4,003,432 4,003,432 3,631,617 3,631,617
Government contracts 160,661 160,661 141,055 141,055 146,183 146,183
Net investment income 13,915 13,915 16,424 16,424 10,964 10,964
Administrative services fees and other income   1,200               1,200   2,712               2,712   1,106               1,106  
Total revenues 3,993,006 160,661 4,153,667 4,022,568 141,055 4,163,623 3,643,687 146,183 3,789,870
Health plan services 3,318,415 3,318,415 3,363,742 3,363,742 3,104,010 3,104,010
Government contracts 158,158 (34 ) 158,124 137,248 14 137,262 123,571 832 124,403
Premium tax 71,374 71,374 67,954 67,954 53,417 53,417
Health insurer fee 58,408 58,408 58,500 58,500 31,947 31,947
Other ACA fees 22,163 22,163 21,495 21,495 26,643 26,643
Administrative expenses   268,628           21,753       290,381   274,610           26,154       300,764   241,352           20,264       261,616  
Total general and administrative 420,573 21,753 442,326 422,559 26,154 448,713 353,359 20,264 373,623
Selling 66,155 66,155 69,190 69,190 66,111 66,111
Depreciation and amortization 6,882 6,882 3,958 244 4,202 6,500 6,500
Interest 8,417 8,417 8,412 8,412 7,810 7,810
Asset impairment                                           84,690       84,690  
Total expenses   3,820,442       158,158     21,719       4,000,319   3,867,861       137,248     26,412       4,031,521   3,537,790       123,571     105,786       3,767,147  
Income (loss) from operations before income taxes 172,564 2,503 (21,719 ) 153,348 154,707 3,807 (26,412 ) 132,102 105,897 22,612 (105,786 ) 22,723
Income tax provision (benefit)   98,812       1,182     (6,899 )     93,095   82,300       1,587     (10,153 )     73,734   61,085       8,918     (38,341 )     31,662  
Income (loss) from operations $ 73,752     $ 1,321   $ (14,820 )   $ 60,253 $ 72,407     $ 2,220   $ (16,259 )   $ 58,368 $ 44,812     $ 13,694   $ (67,445 )   $ (8,939 )
 
Basic earnings (loss) per share $ 0.95 $ 0.02 $ (0.19 ) $ 0.78 $ 0.94 $ 0.03 $ (0.21 ) $ 0.76 $ 0.56 $ 0.17 $ (0.84 ) $ (0.11 )
Diluted earnings (loss) per share $ 0.94 $ 0.02 $ (0.19 ) $ 0.77 $ 0.92 $ 0.03 $ (0.21 ) $ 0.75 $ 0.55 $ 0.17 $ (0.84 ) $ (0.11 )
 
Basic weighted average shares outstanding 77,288 77,288 77,288 77,288 77,172 77,172 77,172 77,172 80,235 80,235 80,235 80,235
Diluted weighted average shares outstanding 78,405 78,405 77,288 78,405 78,157 78,157 77,172 78,157 81,513 81,513 80,235

80,235

 
 
Pretax margin 4.3 % 3.8 % 2.9 %
Western Region Operations premium yield 1.2 % 8.0 % 13.7 %
Western Region Operations premium PMPM $ 405.73 $ 414.68 $ 400.91
Western Region Operations health care cost trend (1.2 )% 7.1 % 15.3 %
Western Region Operations health care cost PMPM $ 338.46 $ 348.42 $ 342.66
Western region operations health plan services MCR 83.4 % 84.0 % 85.5 %
Administrative expense ratio 6.8 % 6.9 % 6.6 %
Total G&A expense ratio 10.6 % 10.5 % 9.7 %
Selling costs ratio 1.7 % 1.7 % 1.8 %
 
1   Includes the operations of the company's commercial, Medicare, Medicaid and Dual Eligibles 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 Primarily includes costs related to the company's transaction with Cognizant. Also includes costs related to the company's pending merger with Centene.
 
4 Primarily includes costs related to the company's transaction with Cognizant. Also includes severance expenses.
 
5 Primarily includes costs related to the company's transaction with Cognizant and related asset impairment.
 

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 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:       Q3 2015       Q2 2015       Q3 2014
(1)   Reserve for Claims and Other Settlements - GAAP $ 1,684.4 1,757.9 1,733.3
Less: Capitation and MAPD Payables   (251.2 )   (374.4 )   (407.1 )
(2) Reserve for Claims and Other Settlements - Adjusted $ 1,433.2 1,383.5 1,326.2
 
(3) Health Plan Services Cost - GAAP $ 3,318.4 $ 3,363.7 $ 3,104.0
Less: Capitation and MAPD Costs   (1,237.6 )   (1,233.0 )   (1,236.0 )
(4) Health Plan Services Cost - Adjusted $ 2,080.8 $ 2,130.7 $ 1,868.0
 
(5) Number of Days in Period 92 91 92
 
= (1) / (3) * (5) Days Claims Payable - GAAP Basis (using end of period reserve amount) 46.7 47.6 51.4
= (2) / (4) * (5) Days Claims Payable - Adjusted Basis (using end of period reserve amount) 63.4 59.1 65.3
 
 
Health Net, Inc.
Reconciliation of Reserves for Claims and Other Settlements
($ in millions)
 
      Health Plan Services
YTD 9/2015       FY 2014       FY 2013
           
Reserve for claims (a), beginning of period $ 1,186.3 $ 807.4 $ 808.7
Incurred claims related to:
Current Year (f) 4,777.0 5,613.0 4,666.0
Prior Years (c)   (109.4 )         (14.6 )         (56.2 )
Total Incurred (b) 4,667.6 5,598.4 4,609.8
 
Paid claims related to:
Current Year 3,540.8 4,443.2 3,872.5
Prior Years   1,035.3           776.3           738.6  
Total Paid (b)   4,576.1           5,219.5           4,611.1  
 
 
Reserve for claims (a), end of period 1,277.8 1,186.3 807.4
Add:
Claims Payable (d) 104.5 175.4 67.0
Other (e) 302.1 534.3 109.7
                 
Reserves for claims and other settlements, end of period $ 1,684.4         $ 1,896.0         $ 984.1  
 
(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 developments related to prior years do not directly correspond to an increase in our operating results 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 favorable development related to prior years that was recorded in the nine months ended September 30, 2015 consisted of $31.7 million in favorable prior year development primarily due to the growth of the new Medicaid expansion population in 2014 and a release of $77.7 million of the provision for adverse deviation held at December 31, 2014. For a detailed description of reserve development for fiscal years 2014 and 2013, see Note 2 to the Consolidated Financial Statements in the company's Annual Report on Form 10-K for the year ended December 31, 2014.
 
(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 $84.3 million, $77.7 million and $53.4 million as of September 30, 2015, December 31, 2014, and December 31, 2013, respectively.
 

Contact:

Health Net, Inc.
Investor Contact:
Peter O’Neill, 818-676-8692
peter.oneill@healthnet.com
or
Media Contact:
Brad Kieffer, 818-676-6833
brad.kieffer@healthnet.com