Health Net Inc. (HNT)

HNT 
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Health Net, Inc. (HNT)

Q4 2012 Earnings Call

January 30, 2013 11:00 am ET

Executives

Angie McCabe – Investor Relations

Jay M. Gellert – President and Chief Executive Officer

Joseph C. Capezza – Executive Vice President, Chief Financial Officer and Treasurer

Presentation

Operator

Good morning, everyone, and welcome to this Health Net, Incorporated Fourth Quarter and Year End 2012 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Angie McCabe, Vice President of Investor Relations. Please go ahead.

Angie McCabe

Thank you, Marly. And thank you for joining us for a discussion of Health Net's fourth quarter and full year 2012 results. During this call, we will make forward-looking statements that are subject to certain risks and uncertainties. Risk factors that may impact those statements and could cause actual future results to differ materially from currently expected results are described in our filings with the SEC as well as the cautionary statements in our press release issued in advance of this call.

In today's call, we will refer to adjusted days claims payable. This adjusted metric is not being presented in accordance with generally accepted accounting principles or GAAP. Please refer to today's press release, which is available on the Company's website for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure days claims payable.

I will now turn the call over to Jay Gellert, Health Net's CEO. Jay?

Jay M. Gellert

Thank you, Angie, and good morning everyone. Today we’re pleased to report fourth quarter results that demonstrate continued progress on the plan we outlined on our second quarter call. There are three key areas we focused on in Q2. One, we have successfully repositioned the large case commercial account. We’ve either gotten more favorable pricing or the accounts have left. On January 1, we renewed approximately 60,000 of these members with necessary premium increases. Accounts representing approximately 40,000 members did not renew.

Second, we recorded no additional adverse prior period development in the second half of 2012 and foresee none in 2013. Combined with mixed changes and large group re-pricing, this supports the 350 basis point yield cost spread we guided to for 2013.

Third, our state sponsored health program business improved significantly from the third quarter to the fourth quarter of 2012. Overall our MCR improved by 270 basis points sequentially as a result of various rate actions that took effect on October 1, 2012 that included addressing the shortfall in FPD rate. Our discussion on further changes in the program including rates, benefits continue. It's important to remember that our new state agreement will help provide P&L predictability and the time to settle the remaining issues. We are pleased that we successfully address each of these issues and met expectations in the second half of 2012.

Before going into more detail about our expectations for 2013 and our future prospects, let me address some fourth quarter results. GAAP EPS was $0.06 per diluted share while diluted EPS from the combined Western Region and Government Contract segment was $0.36. This brought the full year diluted GAAP EPS to $1.46 and the full-year diluted EPS from the combined segment to $1.02 consistent with our previous 2012 guidance range.

The overall health plan MCR in the fourth quarter of 2012 improved sequentially from the third quarter of 2012 by 40 basis points. This expected improvement was driven by both Medicare and Medicaid while the commercial MCR rose from the third quarter of 2012.

Our commercial cost in the fourth quarter were affected by our assumption of higher utilization among members in departing large case accounts, a prudent assumption given historical patterns in similar situation. In addition, risk sharing adjustments with certain providers impacted the commercial MCR. This higher level of risk sharing is a direct result of better-than-expected performance in our tailored network products in 2012.

Underlying commercial cost trends were moderate. We continue to benefit from our pharmacy agreement with CVS, favorable utilization in the tailored network products and lower than expected unit costs.

Our G&A ratio rose sequentially by 40 basis points in the fourth quarter of 2012 versus the third quarter of 2012. This was consistent with our expectations and reflects marketing cost in the fourth quarter.

Adjusted days claims payable rose by half a day sequential in the fourth quarter, though total reserves did decline somewhat. This was the result of a $45 million pass-through payment included in reserves related to state health plans that occurred in the third quarter, otherwise total reserves would have increased sequentially.

Operating cash flow in the fourth quarter exceeded net income plus depreciation and amortization. Operating cash flow for the full-year was impacted by the sale of our Medicare PDP business. The cash benefit of the transaction is reflected in cash flows from investing activities while the costs related to it were recorded in cash flows from operations.

Excluding this effect, operating cash flow for the full year of 2012 would have exceeded net income plus G&A. Our 2013 outlook for operating cash flow is that it will be at least equal to net income plus G&A. Let me add that with the $106 million in cash at the parent as of December 31 2012 and with meaningful incremental debt capacity, we continue to possess substantial capital flexibility.

Let me now turn to the rest of our outlook for 2013 and some initial developments in January. First, we are encouraged by the early results from open enrollment in our small group segment driven by continued interest in our tailored network products in 2013. We expect that these products will comprise approximately 40% of our commercial enrollment by the end of 2013 compared with approximately 35% at the end of 2012.

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