Health Net Lags on Q1 Earnings - Analyst Blog

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Health Net Inc. 's ( HNT ) first-quarter 2014 operating income, which comprised combined net earnings from the Western Region Operations and Government Contracts segments, came in at 39 cents per share. The figure missed the Zacks Consensus Estimate of 43 cents and declined from 62 cents per share earned in the year-ago quarter.

Including pre-tax expenses associated with litigation costs, Health Net recorded net income of 36 cents per share, down from 62 cents in the prior-year quarter.

Higher expenses mainly led to the deterioration.

The company's total revenue increased 8.6% year over year to approximately $3 billion in the first quarter of 2014. However, revenues missed the Zacks Consensus Estimate of $3.3 billion.

Health plan services premium revenues of Health Net stood at $2.9 billion, up 9.5% from the first quarter of 2013. Meanwhile, total health plan service expenses increased 5.9% to $2.4 billion. The company's total expenses increased 9.6% year over year to $2.98 billion.

Segment Performance

Western Region Operations: This segment of Health Net posted revenues of $2.9 billion in the quarter, up from approximately $2.7 billion in the year-ago quarter. Net investment income for the segment declined to $11.1 million from $29.6 million in the year-ago quarter on account of absence of investment gains during the reported quarter. Health plan services expenses increased 4.3% year over year to $2.4 billion.

Total enrollment in the segment rose 6.7% year over year to 2.6 million members as of March 31, 2014. Western Region commercial enrollment fell 4.7% to 1.1 million members as of March 31, 2014, while the enrollment under the company's California health plans increased 6.1% year over year. However, enrollment increased 9.4% to 0.26 million in Medicare Advantage plans. Medicaid enrollment also increased 17.9% to 1.3 million as of March 31, 2014.

Medical care ratio (MCR) for Health Net's health plan services in the segment improved to 83.4% from 86.2% in the year-ago quarter. Commercial MCR improved 500 basis points to 80.9% from 85.9% in the prior-year quarter. This was driven by an improvement in business mix that was triggered by a rise in individual enrollment.  Medicare Advantage MCR improved to 91.8% from 91.9% a year ago. Medicaid MCR amounted to 79.8% compared with 80.0% in the year-ago quarter.

Government Contracts: Revenues from this segment increased to $144.1 million from $134.5 million in the first quarter of 2013. The segment's expenses also rose to $131.1 million from $125.5 million in the prior-year quarter.

Financial Update

As March 31, 2014, Health Net had cash and investments of approximately $2.4 billion, up from $2.1 billion as of Dec 31, 2013. The company's debt-to-total capital ratio improved to 22.9% as of March 31, 2014 from 23.5% as of Dec 31, 2013.

Health Net's operating cash inflow was $311.5 million in the first quarter of 2014, comparing favorably with $28.2 million of cash outflow in the year-ago quarter. Timing related to claims and capitation payments, and expenses related to the U.S. healthcare reform mainly led to the upside. For full-year 2014, management expects operating cash flow to stand at a value equal to the sum of net income, and depreciation and amortization.

Total assets of Health Net were worth $4.4 billion as of March 31, 2014, higher than $3.9 billion as of Dec 31, 2013. Stockholder equity was $1.7 billion as of March 31, 2014 compared with $1.6 billion as of Dec 31, 2013.

Share Repurchase Update

Health Net refrained from any share repurchase activities during the first quarter of 2014. Currently, the company is left with $280 million worth of shares to be repurchased under its existing $400 million authorization.

Outlook for 2014

Health Net reiterated its reported net income guidance of a minimum of $3 per share for full-year 2014.

Total health plan membership is now expected to be 3.05 million, higher than the previous guidance of 3.04 million. This is because total commercial membership is anticipated to be 1.2 billion, (up from the previous guidance of 1.15 billion).

Health Net lowered its revenue guidance to $14 billion from $14.4 billion as the company now expects total health plan revenues to be $13.3 billion, lower than the previous expectation of $13.8 billion.

Health Net reiterated its 2014 G&A expense ratio guidance at 10.8%.

Other Healthcare Services Companies

WellPoint Inc. ( WLP ) reported first-quarter 2014 adjusted income of $2.30 per share, beating the Zacks Consensus Estimate of $2.12 per share.

Molina Healthcare Inc. ( MOH ) reported first-quarter 2014 operating earnings of 10 cents per share, beating the Zacks Consensus Estimate of a break-even.

Tenet Healthcare Corp. ( THC ) reported first-quarter 2014 operating loss of 12 cents that was narrower than the Zacks Consensus Estimate loss of 15 cents per share.

Zacks Rank

Health Net presently carries a Zacks Rank #3 (Hold).


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



This article appears in: Investing , Business , Earnings , Stocks

Referenced Stocks: MCR , HNT , MOH , THC , WLP

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