Health Net’s (HNT) third-quarter earnings per share came in at 67 cents, well above the Zacks Consensus Estimate of 61 cents and the year-ago earnings of 35 cents. The company reported revenues of $4 billion, an increase of 3.9% compared to the corresponding quarter of last year. The company receives revenues in the form of health plan service premiums, government contracts, net investment income and administrative services, fees and other income.

Health plan services premium, accounting for approximately 80% of total revenues during the quarter increased 3% year over year to $3.17 million. While revenues from government contracts increased 4.7% to $758 million, sequentially, it came down by 8.8%. We believe revenues from government contracts will decline further with the loss of contract in July with the Department of Defense awarding Aetna (AET) the $2.8 billion managed care contract to provide services for the northern region of the department’s TRICARE program, replacing Health Net. However, Health Net protested against this move to the US Government Accounting Office; a final decision is yet to be taken.

In July, Health Net entered into an agreement with UnitedHealth Group (UNH) under which UnitedHealth acquired the northeast commercial operations of Health Net for about $510 million. We believe this decision was taken so that Health Net could concentrate on its core western markets.

At the end of the reported quarter, total health plan and total commercial risk enrollment were 3.6 million members, a decline of 3.8% and 166, 000 members, a decline of 8%, respectively compared with the year ago period. Apart from Medicaid enrollment, which increased 13.5% compared to the third quarter of 2008, enrollment in Medicare Advantage plan and Medicare PDP plans declined by 2.4% and 13.4%, respectively. The rise in Medicaid enrollment was the result of economic downturn, which causes the Medicaid-eligible population to increase.

Medical care ratio (MCR), calculating the amount paid in claims compared to premiums received for Health Net’s health plan services, declined to 86.4% during the quarter compared to 87.5% in the year ago period.

In addition to posting quarterly results, Health Net revised its outlook for 2009. The company now expects earnings per share at the lower end of its prior guidance, at $2.25 – $2.30 compared to the earlier guidance of $2.25 – $2.35. We believe higher costs related to the spread of H1N1 virus and expansion of COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) membership by laid-off workers made the company lower its outlook. Under COBRA, people can continue their employer sponsored insurance coverage even after they lose their jobs.

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