Health Net Lags on Lower Revenue - Analyst Blog


Shutterstock photo

Health Net Inc. 's ( HNT ) reported income amounted to $60.2 million or 71 cents per share in the fourth quarter of 2011, down substantially from $80.4 million or 83 cents per share in the year-ago quarter.

The reported income includes a $26.8 million pre-tax loss related to the run-out of the company's remainingNortheast operations and a $3.3 million pre-tax expense related to the company's administrative cost reduction efforts. Prior-year income includes a $24.9 million non-cash benefit to health plan expenses related to a litigation reserve true-up and $13.0 million of expenses primarily related to litigation expenses and overhead cost reduction efforts.

Health Net's Western Region and Government Contracts segments produced combined net earnings of 90 cents per share, showing a year-over-year growth of 12.5% from 80 centsper share in the fourth quarter of 2010.

The company reported a 16.6% year-over-year downside 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.

Total expenses increased marginally by 1.1% 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 $10 million from $15.1 million, while health plan services expenses by 5.3% to $2.2 billion from $2.1 billion.

Total enrollment in the segment increased approximately 3.5% from December 31, 2010 to 3.0 million members, while total commercial enrollment declined 1.2% to 1.4 million members. Enrollment in the company's California health plan was about 2.3 million members, up marginally from 2.2 million members on December 31, 2010, due to increased Medicaid enrollment in California.

Although enrollment in the tailored network products recorded a year-over-year increase of 35.1%, enrollment in Medicare Prescription Drug Plan ( PDP ) and Medicare Advantage plans declined 10.5% and 7.7%, respectively.

Medical care ratio ( MCR ) for Health Net's health plan services in the segment remained flat at 85.2% during the reported quarter while C ommercial MCR declined 70 bps to 84.8%.

While Medicare Advantage MCR increased to 90.5% compared with 89.4% in the year-ago quarter, PDP MCR climbed to 59% from 53.1%.

Government Contracts: Revenues in the segment declined to $194.6 million from $822.4 million in the fourth quarter of 2010, 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 and related performance incentives and guarantees 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.

While there were no revenues associated with the company's Northeast Operations in the quarter, expenses amounted to $26.8 million.

Additionally, Health Net received $80 million tangible net equity payment from UnitedHealth in the fourth quarter of 2011. The payment was recorded in "Cash Flows from Investing Activities" in the company's financial statements.

Full-Year 2011 Highlights

For full year 2011, Health Net's reported net income came in at $72.1 million or 80 cents per share, plummeting from $204.2 million or $2.06 per share in 2010.

Health Net's Western Region and Government Contracts segments produced combined net earnings of $3.09 per share, showing a year-over-year growth of about 19% from $2.60 in 2010.

Total revenue was $11.9 billion, down 12.5% year over year from $13.6 billion while marginally exceeding the Zacks Consensus Estimate of $11.8 million.Moreover, total expenses decreased 12% over 2010 to $11.7 billion.

Financial Update

As on December 31, 2011, Health Net recorded cash and investments of approximately $1.8 billion, down from $2.0 billion as on December 31, 2010. In addition, the company's debt-to-total capital ratio increased to 26.2% as compared with 19.0% as on December 31, 2010.                    

Further, Health Net's operating cash outflow was $119.8 million in the reported quarter, primarily due to the unfavorable timing of the payments received from the Centers for Medicare & Medicaid Services.

Total assets of the company stood at $3.6 billion as of December 31, 2011, down from $4.1 billion a year ago. Shareholders' equity also declined to $1.44 billion from $1.69 billion as of December 31, 2010.

Business Update

On January 9, 2012, Health Net Life Insurance Company, a subsidiary of Health Net, announced an agreement to sell its Medicare stand-alone PDP business to a unit of CVS Caremark Corporation. The company expects to complete the divestiture in the second quarter of 2012, su bject to the required approvals from the Centers for Medicare and Medicaid Services and other regulatory bodies and other customary closing conditions.

Although the deal is valued at $160 million, Health Net anticipates net cash inflow of $140 million from the transaction, after deducting taxes, transaction costs, transition costs and the effect of freed-up capital.

Stock Update

During the reported quarter, Health Net repurchased 2.7 million shares for approximately $70.7 million under the current share repurchase program. In 2011, the company repurchased 13.6 million shares for $373.5 million.

Remaining authorization under the $300 million repurchase program stood at $76.3 million as on December 31, 2011.

Outlook for 2012

Health Net reiterated its GAAP EPS guidance of $2.80-2.90 and the combined Western Region and Government Contracts segments' guidance of $3.30-3.40. The guidance excludes the impact of any future share repurchase and the potential impact of the proposed divestiture of the Medicare PDP business.

The guidance for Health Net's total membership increase is flat to 1% and increase in Medicare PDP is 10−12%. Enrollment in the commercial business is expected to decline by 3−5%, while enrollment in Medicare Advantage is expected to increase by 8−10% and that in Medicaid is expected to be up by 3−5%.

Consolidated revenue is expected to be around $11.5−12.0 billion, while tax rate for Health Net is expected to be 38−39%.

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 8.6−8.8%.

Health Net carries a Zacks #2 Rank, which implies a short-term Buy rating.

HEALTH NET INC ( HNT ): Free Stock Analysis Report
UNITEDHEALTH GP ( UNH ): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
More Headlines for: HNT , MCR , PDP , UNH

More from


Equity Research
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by