Health Net Inc. (HNT) reported third-quarter income of $85 million or 96 cents per share, which surpassed the Zacks Consensus Estimate of 83 cents. The income was also higher than $71.3 million or 73 cents earned in the prior-year quarter.
The reported income excludes an $18.6 million pre-tax loss related to the run-out of the company’s remaining North-East operations and a $4.6 million pre-tax expense related to the company’s administrative cost reduction efforts. Prior-year income excludes expenses of $8.6 million related to severance costs.
Health Net’s Western Region and Government Contracts segments produced combined net earnings of 85 cents per share, showing a year-over-year growth of 215%.
The company reported a 17.9% year-over-year decline in total revenues to $2.8 billion from $3.4 billion, primarily due to the decline in Government Contracts revenues. Revenue was almost in line with the Zacks Consensus Estimate.
However, Health Net’s health plan services premium revenues increased by 4.5% to $2.6 billion, while investment income declined to $15.2 million from $19.5 million in the prior-year quarter. Total expenses also declined 18% year over year to $2.7 billion.
Segment Performance
Western Region: The segment posted revenues of $2.6 billion, compared with $2.5 billion in the year-ago quarter. Net investment income for the segment decreased year over year to $15.2 million from $19.2 million, while health plan services expenses increased to $2.2 billion from $2.1 billion.
Total enrollment in the segment increased approximately 1.0% to 3.0 million members, while total commercial enrollment remained flat at 1.4 million members. Although enrollment in the tailored network products recorded a year-over-year increase of 45%, enrollment in Medicare Prescription Drug Plan (PDP) and Medicare Advantage plans declined 11.8% and 8.1%, respectively.
Medical care ratio (MCR) for Health Net’s health plan services in the segment declined 20 basis points (bps) to 86.1% during the reported quarter compared to 86.3% in the year-ago period and Commercial MCR declined 150 bps to 84.8%.
While Medicare Advantage MCR increased to 90.7% compared with 89.4% in the year-ago quarter, PDP MCR climbed to 78.4% compared with 64.6% in the prior-year quarter.
Government Contracts: Revenues in the segment declined to $175.8 million from $860.7 million in the prior-year quarter, mainly due to the new T-3 TRICARE North contract implemented on April 1, 2011, which allows only revenues and costs related to the administrative services to be recognized.
Northeast Operations: During the reported quarter, Health Net administered run-out claims for the Northeast business under a claims servicing agreement with UnitedHealth Group Inc. (UNH), the income for which is shown separately.
The revenues and expenses associated with the company’s Northeast Operations in the quarter were $11.0 million and $29.6 million, respectively.
Additionally, Health Net received $41.1 million from UNH for membership transition in the third quarter of 2011 and expects to receive an approximately $80.0 million tangible net equity payment in the fourth quarter of 2011. These payments are recorded in “Cash Flows from Investing Activities” in the company’s financial statements.
Financial Update
As on September 30, 2011, Health Net recorded cash and investments of approximately $2.0 billion, down from $1.9 billion as on September 30, 2010. In addition, the company’s debt-to-total capital ratio increased to 27.4% as compared with 19.0% as on December 31, 2010.
Further, Health Net’s operating cash flow was $520.7 million, primarily due to a $293.0 million advance receipt from the Centers for Medicare & Medicaid Services, $104.0 million TRICARE receipts and $66 million Medicare receivables net of $35.0 million in related provider capitation expenses.
Total assets of the company stood at $3.87 billion as on September 30, 2011, down from $4.19 billion a year ago. Shareholders’ equity also declined to $1.44 billion from $1.69 billion as on September 30, 2011.
Stock Update
During the reported quarter, Health Net repurchased 5.2 million shares for approximately $125.8 million under the current share repurchase program. The average purchase price was $24.32.
Remaining authorization under the $300 million repurchase program stood at $147.1 million as on September 30, 2011.
Outlook for 2011
Health Net increased its GAAP EPS guidance to the range of 71 cents to 73 cents.
The company also increased its EPS guidance for the combined Western Region and Government Contracts segments to the range of $3.08-3.10. The guidance excludes the impact of any future share repurchase.
Additionally, the company reaffirmed its operating cash flow guidance of $100 million.
The guidance for year-end membership increase in the Western Region is 3%-4% and decrease in PDP is 11%-13%. Enrollment in the commercial business is expected to remain flat, while enrollment in Medicare Advantage is expected to decline by 8%-10% and that in Medicaid is expected to be up by 9%-11%.
Consolidated revenue is expected to be around $11.8 billion, while tax rate for Health Net is expected to be 38.7%.
The company also expects selling cost ratio to be approximately in the range of 2.3%-2.4% and general and administrative expense ratio to be approximately in the range of 8.7%-8.9%.
Health Net carries a Zacks #3 Rank, which implies a short-term Hold rating.
