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Health Net (HNT)

Q1 2014 Earnings Call

May 07, 2014 11:30 am ET


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


Ana Gupte - Leerink Swann LLC, Research Division

Sarah James - Wedbush Securities Inc., Research Division

David A. Styblo - Jefferies LLC, Research Division

Matthew Borsch - Goldman Sachs Group Inc., Research Division

Jack Meehan - Barclays Capital, Research Division

Stephen Baxter - BofA Merrill Lynch, Research Division

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

Christine Arnold - Cowen and Company, LLC, Research Division

Carl R. McDonald - Citigroup Inc, Research Division

Christian Rigg - Susquehanna Financial Group, LLLP, Research Division



Welcome to the Health Net, Inc. First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this call is being recorded.

During this call, Health Net management 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 Health Net's filings with the SEC, as well as the cautionary statements in Health Net's press release issued in advance of this call.

In today's call, management 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 the Health Net's current report on Form 8-K as filed today with the SEC for a reconciliation of this non-GAAP financial measure with the most directly comparable GAAP financial measure, days claims payable. The Form 8-K is available on the company's website.

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

Jay M. Gellert

Thanks, operator, and good morning. From the time the ACA passed, we believe that it would fundamentally change health care and the way this sector operates. While the speed of change varies by market, the states where we operate, in particular, California, are clearly showing some of the most rapid change.

Our first quarter reflects this change. We viewed 2014 as a transition year for our company and the quarter demonstrated significant progress in many key areas. Our performance in these areas was consistent with our expectation and clearly shows substantial improvement compared with '13.

I'm going to focus my comments on 3 key areas: commercial, Medicaid and the duals, and Medicare. Then I'll address our progression on G&A levels through the balance of the year. And finally, I'll comment on our strong cash flow and the balance sheet.

The commercial story is about our strong enrollment performance on the individual exchanges, combined with solid overall MCR results. Small group and individual enrollment rose by 20% in the first quarter of '14, compared with the first quarter of '13. Driving this growth was our better-than-expected start with the individual exchanges, particularly with Covered California.

As of March 31, 2014, we had enrolled 153,000 new individual members through the exchanges. We enrolled a sizable portion of these in the last 2 weeks of March. We've added an additional 54,000 members in April. Through April, 74% of our exchange enrollment is members who are new to Health Net. In May, we expect to add 90,000 to 100,000 new members, which would bring our total number of new members to approximately 300,000. This performance caused us to raise our full year guidance for individual enrollment by approximately 110,000.

We've done remarkably well in Southern California, which we target. As an example, Covered California is reporting that our individual exchange market share is now nearly 1/3 of the total exchange market there. We're encouraged that the enrollment is coming in those areas we focused on in planning for the exchanges.

We've enrolled approximately 105,000 people, or approximately 72% of our exchange membership, in our key Silver plan offerings as of March 31, '14. Our Silver membership has nearly doubled since the end of the quarter. As a reminder, we targeted individuals who received subsidies in the exchange. 87% of our exchange membership at March 31 is definitely eligible. Also, since California did not grandmother individual plans, the risk profile of the exchange membership is consistent with our expectations.

With the enrollment surge in late March and early April, we currently expect that commercial member months will rise by approximately 16% in the second quarter, versus the first quarter of '14. The commercial MCR in the first quarter of this year improved by more than 500 basis points when compared with the first quarter of '13. The mix of our business, driven by exchange growth, continues to be increasingly favorable, as more members choose tailored network products.

In commercial, we continue to see favorable utilization metrics across the board. Over the past 2 years, we have substantially transformed our commercial footprint, moving to tailored network products. They have become the backbone of our product strategy in the exchanges. We believe these favorable trends will continue.

At the end of the first quarter, approximately 55% of our commercial members were in tailored network products. In addition, approximately 85% of our exchange enrollment in March 31 is in tailored network products. By the end of the year, we expect approximately 60% of our total commercial enrollment to be in tailored network products.

Let me now turn to Medicaid. The enrollment news is very positive there also, thanks largely to Medicaid expansion. Through March 31, 2014, we enrolled 166,000 new Medicaid members from this expansion population. This accounted for 92% of our overall Medicaid enrollment growth. Many of these members had gone to Covered California and found out that they were qualified for Medicaid. The transition is causing a backlog in processing at the state, according to recent news reports.

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