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
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.
View source
version on businesswire.com: http://www.businesswire.com/news/home/20151102005499/en/
Health Net, Inc.Investor Contact:Peter O’Neill,
818-676-8692peter.oneill@healthnet.comorMedia Contact:Brad
Kieffer, 818-676-6833brad.kieffer@healthnet.com
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