Health Net Inc. (HNT)

HNT 
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Health Net (HNT)

Q4 2013 Earnings Call

February 11, 2014 11:00 am ET

Executives

Angie McCabe - Vice President of Investor Relations

Jay M. Gellert - Chief Executive Officer, President and Director

Analysts

David H. Windley - Jefferies LLC, Research Division

Kevin M. Fischbeck - BofA Merrill Lynch, Research Division

Michael A. Newshel - JP Morgan Chase & Co, Research Division

Bo Brandt - Goldman Sachs Group Inc., Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Sarah James - Wedbush Securities Inc., Research Division

Ana Gupte - Leerink Swann LLC, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Christine Arnold - Cowen and Company, LLC, Research Division

Presentation

Operator

Good morning, everyone, and welcome to this Health Net, Inc. Fourth Quarter and Year End 2013 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, Ginger, and thank you all for joining us for a discussion of Health Net's fourth quarter and full year 2013 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 CEO.

Jay M. Gellert

Good morning. I want to begin by briefly reviewing our 2013 accomplishments and how, particularly in the fourth quarter, they set us up for 2014 and for 2015, when our new businesses will be fully operational.

As we entered '13, we focused on 3 key issues. One, improving margins in our commercial book of business; two, achieving improved rates and greater stability in our Medicaid business; and three, meeting our financial performance goals in '13 without recording any adverse prior year reserve development.

In addition, we knew we had to make necessary investments to prepare for the exchanges, Medicaid expansion and the duals. I'm happy to report that I believe we've achieved all our goals, driving significant improvement in '13 compared with '12.

Going into '13, we focused a great deal of effort on changes to our commercial book of business. As evidence of our success, the year-over-year commercial MCR improved by 320 basis points, and the gross margin per member per month increased 32.4%. These achievements were the direct result of our tailored network products strategy and disciplined pricing across the board.

The Medicaid MCR in 2013 also improved substantially compared with '12. Most of the improvement is a result of favorable rate actions, the reinstatement of California Medicaid premium taxes and the State Settlement Agreement. Going forward, we received annual rate increases for both the TANF and SPD populations, some of which took effect on October 1, 2013, and others on January 1, 2014.

It's clear from these developments that our State Settlement Agreement is working as intended, strengthening state programs for us and for the state. We recorded no adverse prior year reserve development in '13.

Consistent with our expectations, we ended '13 with approximately $209 million in cash and investments at the parent, and a low 23.5% debt-to-total capital ratio, which provides us with ample capital flexibility as we enter '14.

Finally, our G&A was higher in '13, as expected, driven by the investments we made to prepare for the exchanges, duals and Medicaid expansion, and as we continue to pursue a resolution to the scale issues we've identified.

We made it our top priority, particularly in the fourth quarter, to do what it took to get off to a clean start in '14, and that really paid off. As of yesterday, we enrolled approximately 315,000 new members, ACA related, approximately 165,000 through the exchanges and 150,000 from Medicaid expansion. Approximately 85% of our exchange enrollees who signed for 1/1/14 have paid their premiums, and approximately 70% of enrollees signed for February 1, '14 have already paid.

Medicare enrollment as of 1/1/14 was higher than expected from both new sale and retentions. We expect further growth from the exchanges throughout the first quarter of '14.

Taken together, this represents a strong enrollment start to '14, as we gradually ramp up to an expected 600,000 total new members by year end. Fourth quarter '13 results were affected by these transitions in a number of relatively minor ways.

As you know, California did not extend canceled individual policies. As a result, the commercial MCR in the fourth quarter of '14 (sic) ['13] was 40 basis points higher than the guidance we gave at the end of the third quarter. The higher MCR was due to a higher utilization in noninpatient areas, mostly among members who left us on December 31, '13.

In the fourth quarter, we spent approximately $4 million more than expected to support the onboarding of the better-than-expected exchange Medicaid and Medicare enrollment. The higher fourth quarter G&A was partially offset by a lower tax rate. $6 million of other income reflects the ACA reimbursement adjustment for Medicaid primary care services and related G&A. This was anticipated. This Medicaid adjustment and related G&A will continue throughout 2014.

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