Health Net Inc. (HNT)

HNT 
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Health Net Inc. (HNT)

Q1 2009 Earnings Call

May 5, 2009 11:00 am ET

Executives

Angie McCabe – Vice President of Investor Relations

Jay Gellert – Chief Executive Officer

Jim Woys – Chief Operating Officer

Joe Capezza – Chief Financial Officer

Analysts

[Christine Arnold] – Cohen & Company

Charles Boorady – Citigroup

Matthew Borsch – Goldman Sachs

Greg Nersessian – Credit Suisse

Carl McDonald – Oppenheimer

Josh Raskin – Barclays Capital

Scott Fidel – Deutsche Bank

Justin Lake – UBS

John Rex – JP Morgan

Presentation

Operator

Welcome to the Health Net Inc. first quarter 2009 earnings conference call. (Operator Instructions) At this time, I will turn the call over to Angie McCabe, Vice President of Investor Relations.

Angie McCabe

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 filing 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 various metrics that have been adjusted to exclude the impact of a $2.2 million pre-tax benefit for litigation reserve true-up, a $46.9 million pre-tax charge for severance and other expenses related to the company's operations strategy, and $6.3 million for the favorable outcome resulting from a tax audit in the first quarter of 2009. In addition metrics in the first quarter of 2008 have been adjusted to reflect previously announced litigation and operation strategy related charges.

These adjusted metrics are not being presented in accordance with GAAP. These metrics include health plan and commercial medical care ratios, commercial health care cost trends, general and administrative expense ratio, effective tax rate, net income and earnings per share. Please refer to today's press release which is available on the company's website for a reconciliation of these non-GAAP financial measures with operating results.

In addition, a supplemental schedule showing a breakout of reserves in healthcare costs for 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 claimed payable excluding the costs noted above.

Our speakers today are Jay Gellert, Health Net's CEO, Jim Woys, Health Net's Chief Operating Officer and Joe Capezza, Health Net's CFO. I will now turn the call over to Jay Gellert.

Jay Gellert

I'm pleased to report on a solid first quarter for Health Net. It's a very encouraging start to 2009. As the first quarter demonstrated, we've clearly taken a number of important steps, steps that we outlined at our Investor Day last November. At that time, we proposed the following yardsticks for '09 performance. One, significant improvement in Medicare PDP and MA, two, commercial margin expansion, three, ongoing success with TRICARE, four, G&A savings and five, value creation through our strategic review.

We have made real progress in each of these areas in the first quarter. First, our Medicare performance improved significantly consistent with our plan. When we developed our bids and submitted them last June, we knew that MA and Part D had to do better. They are doing better with substantial MCR improvement. When you compare Q1 '09 to Q1 '08 MCRs you see MA improved from 89.7% to 89.1% and PDP improved from 103.7% to 94.1%. We believe they'll continue to demonstrate year-over-year improvements through the balance of '09.

Second, we saw substantial improvement in our commercial performance. Gross margin PMPM rose 17% year-over-year as pricing was solid and healthcare cost trends moderated. Our enrollment declines were as expected given the current economic environment, but we are encouraged by the fact that new sales exceeded expectations driven by narrow network cost effective products.

Moving on to TRICARE, we continue to perform solidly and await the contract award announcements. Like many of you, we hear all kinds of rumors. We remain confident that our exemplary work for TRICARE over many years will be rewarded. Jim Woys will add color to this in his comments in a moment.

Our strategy to restructure operations and reduce G&A is gaining traction. The ratio dropped by 60 basis points on an adjusted basis. As many of you know, this continues to be an area of focus and we believe we'll continue to reduce these costs going forward.

Now, let me make a brief comment on our strategic review. It is progressing and we believe we will achieve our stated goals related to this review. We are working hard to complete the process. I now want to take just a moment to give you our view on healthcare reform. We believe there is a high likelihood of healthcare reform this year.

We think it's in the industry's interest and our interest to see sensible reform this year. We believe that reform will add a number of people to the commercial and Medicaid population, particularly in states such as California with a high number of uninsured. It will also free up the low end of small group and individual markets where we believe we have developed compelling offerings. The first quarter new sales achievement underscores this point. Sensible reform will need to include a strong emphasis on cost containment.

We believe we can play a constructive role as many of the key elements being discussed mimic the delegated models so prevalent here in California. While there will clearly be Medicare Advantage cuts, we believe it would be unwise to undermine the program where it operates in line with the new model being proposed.

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