Health Net Inc. (HNT)

HNT 
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Health Net, Inc. (HNT)

Q4 2008 Earnings Call Transcript

February 3, 2009 11:00 am ET

Executives

Angie McCabe – VP, IR

Jay Gellert – President and CEO

Jim Woys – EVP and COO

Joe Capezza – EVP and CFO

Analysts

Matthew Borsch – Goldman Sachs

Carl Mcdonald – Oppenheimer

Kyle Smith – Jefferies & Company

Josh Raskin – Barclays Capital

Charles Boorady – Citi

Justin Lake – UBS

John Rex – J.P. Morgan

Greg Nersessian – Credit Suisse

Presentation

Operator

Good day, everyone, and welcome to this Health Net, Inc. fourth quarter and full year 2008 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, ma’am.

Angie McCabe

Thank you, Kayla. Good morning. 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.

Health Net reported earnings per diluted share of $0.34 in the fourth quarter of 2008, including approximately $47.8 million in charges. Excluding the charges Health Net’s earnings per diluted share was $0.61.

In today’s call, we’ll refer to various adjusted amounts that exclude the impact of the charges taken in the fourth quarter and throughout 2008. Unless otherwise noted, these adjusted amounts are in not accordance with Generally Accepted Accounting Principles. Today’s press release, which is available on the Company’s website includes a reconciliation of non-GAAP financial measures with operating results, excluding these charges.

In addition, a supplemental schedule showing a breakout of reserves and health care costs per capitation, provider settlements and the impact of Part D is included in the press release. These supplemental items provide the basis for discussion of operating metrics excluding the charges where appropriate and discussion of days claims payable, excluding the costs noted above.

Let me now turn the call over to our CEO, Jay Gellert. Jay?

Jay Gellert

Thank you, Angie and good morning everyone. In our Investor Day last November, we laid out a plan to improve our performance and increase shareholder value. The plan consisted of the following

First, hit our Q4 target. Second, realize adequate returns from the money we have invested in Northeastern Arizona. Third, achieve our 2009 plan through improved performance in Medicare and in our commercial businesses in California and Oregon, and through the continuation of our operation strategy. And fourth, to vision ourselves for the future with a strong balance sheet, targeted growth strategies in our California and Oregon markets, continued success in Medicare, Medicaid and TRICARE and a solid position from which we can respond changes in government policy and the environment.

We have made substantial progress since November with our plan. We met our fourth quarter expectations. Today, we reported an adjusted diluted EPS of $0.61. Our adjusted Health Plan MCR was 85.5%, while the adjusted commercial MCR was 84.4% and the adjusted G&A was 9.5%, in line or better than what we guided to in each category.

Our balance sheet is strong with approximately $150 million of cash as apparent, a current ratio of 1.6 times. Tangible net equity of $843 million and an increase in days claims payable between the third and fourth quarters of 2008.

We are encouraged by our 2009 prospects. January 1 enrollment is coming a little better than we thought with strong commercial yield increases of 9% PMPM and a positive yield to cost spread. We are particularly encouraged by the strength of our narrow networked commercial products. Our Medicare MA enrollment is coming in the right place where our network model plans are well established.

This will aid us in meeting our margin improvement goal of 150 basis points in MA MCR in 2009. Our Part D enrollment decreased in the places where we sustained losses last year, giving us increased confidence in our goal of the 500 basis point MCR improvement year over year. We slightly ahead of schedule with our operations strategy, and the acceleration in asset write offs reflects it.

Cash flow for 2009 is expected to be better than prior guidance as the Medicare Part D receivable that we accrued in Q4 due to our 2008 expense will be paid to us by CMS in 2009. The Part D receivable is impacted by the fact that our members are primarily dual eligible and the government’s owes us for both the members share in the doughnut hole as well as catastrophic reinsurance.

We are actively engaged in the Northeastern Arizona process, where we have more than $500 million in excess capital that is currently not producing an adequate return. Upon completion of this process, we believe we will be positioned for the future with solid commercial and Medicare operations, TRICARE, Medicaid and a more efficient G&A structure. It also will allow us to continue to develop products and services attuned to the changing environment.

With regard to the changing environment, the first round of activity under President Obama is starting to pick up. The federal stimulus plan enhances corporate by providing premium assistance and by extending the period of corporate coverage. This could lead to more corporate members in a more representative mix of corporate members. We also believe that the proposed FMAP increases will help secure funding for Medicare.

Read the rest of this transcript for free on seekingalpha.com