Health Net Inc. (HNT)

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Health Net (HNT)

Q2 2011 Earnings Call

August 04, 2011 11:00 am ET

Executives

Joseph Capezza - Chief Financial Officer and Executive Vice President

Jay Gellert - Chief Executive Officer, President and Director

Analysts

Joshua Raskin - Barclays Capital

Peter Costa - Wells Fargo Securities, LLC

Justin Lake - UBS Investment Bank

Carl McDonald - Citigroup Inc

Charles Boorady - Crédit Suisse AG

David Windley - Jefferies & Company, Inc.

Unknown Analyst -

Ana Gupte - Sanford C. Bernstein & Co., Inc.

Thomas Carroll - Stifel, Nicolaus & Co., Inc.

Doug Simpson - Morgan Stanley

Christine Arnold - Cowen and Company, LLC

Kevin Fischbeck - BofA Merrill Lynch

Presentation

Operator

Good morning, everyone, and welcome to today's Health Net Inc. Second Quarter 2011 Conference Call. Today's call is being recorded. Thank you for joining us for a discussion of Health Net's second quarter 2011 results.

During this call, we will make forward-looking statements are subject to certain risks and uncertainties. Risk factors that may impact those statements and can 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, which excludes reserves from health plan services expenses related to the company's capitation, provider and other claim settlements and Medicare stand-alone Prescription Drug Plan payables and cost. This adjusted metric is not being presented in accordance with Generally Accepted Accounting Presentables (sic) [Principles] 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 Gellert

Thank you and good morning. I'm pleased to report this morning on another solid quarter for Health Net. We made significant progress over the past 2.5 years and believe we are well-positioned for growth in the years ahead. The first half results support our improving view on the full year of 2011. We've raised guidance for earnings, from the combined Western Region and Government Contract segment to between $3 and $3.05 per diluted share.

Looking specifically at the second quarter, we see that earnings per diluted share have shown strong growth. On a GAAP basis, earnings per diluted share climbed by 40% compared to the second quarter of 2010. For the combined Western Region and Government Contract segment, diluted EPS rose by approximately 25% compared with the second quarter of 2010. Western region operating revenue rose year-over-year. Total health plan enrollment was up modestly despite the Medicare sanction. We also had higher PMPM premiums.

The pre-tax margin, on a GAAP basis, improved significantly to 3.2% compared with 2.3% in the second quarter of 2010. For the Western Region and Government Contract segment, the pre-tax margin is the second quarter of 2011 rose by 110 basis points to 4.1% compared with the second quarter of 2010. We've noted for some time that our strategies support margin expansion for the combined Western Region and Government Contract segment. We believe we have opportunity to continue these gains going forward.

We did very well in commercial. The second quarter of '11 showed further commercial enrollment gains in targeted market segments. Gross margin, PMPM climbed by 9% in the second quarter of '11 versus the comparable prior year period. Total risk enrollment was up by approximately 2,000 members in the second quarter of '11 compared with the second quarter of '10. In-group losses continue to moderate, and we've been growing enrollment in key segments such as the midmarket. This is especially encouraging, given California's 11.8% unemployment rate.

Our risk enrollment growth is being driven by gains in our Tailored Network products. Membership in these products grew by 48.2% or approximately 137,000 members from the end of 2010 second quarter to the end of 2011 second quarter. That enrollment now accounts for 31% of our commercial risk membership. The premiums in these products are 10% to 20% lower for the same coverage when compared with full network products. We believe our Tailored Network Products are well-positioned to achieve further growth in the future. We believe these products will also do well under healthcare reform.

Further confirmation of our commercial progress comes when we look at MCR as yield cost spreads. The commercial MCR improved by 60 basis points year-over-year in the second quarter of '11. The spread between the PMPM premium yield and healthcare cost was 70 basis points, the same as the first quarter, and substantially better than the 20 basis points in 2010 second quarter.

Commercial cost trends remain moderate. In fact, our second quarter experience looks better than the first quarter. As a result, we've raised guidance on the spread between PMPM premium yields and cost. It's now 140 to 150 basis points for the full year of '11, up from our first quarter of yield of 100 to 120 basis points. The PMPM yield gain was 4.7%, lower than the first quarter, but that was due to a onetime premium reconciliation with a large employer group. Absent that change, the PMPM yield gain would have been more than 5%. We've lowered our annual PMPM yield guidance slightly. This is a result of factored Tailored Network Product growth, greater benefit buy downs, and larger geographic mix shifts.

Turning to Medicare, as of Monday, August 1, 2011, CMS lifted certain marketing and enrollment sanctions against Health Net. We're now able to sign up new members with September 1 effective dates. In June, we submitted bids for 2012 and we can now look forward to our active participation in the annual enrollment period, starting October 15 for January 1 enrollment. The absence of new members due to these sanctions affected both MA enrollment and MCR. There were some revenue timing items that impacted the MCR in the second quarter. We continue to grow and do well in Medicaid. But the tough economy continues to drive Medicaid enrollment higher for Health Net. In addition, on June 1, we started enrolling new members from the Senior and Persons with Disability population here in California under a new mandatory managed care program. This population historically but has been in feed for service Medicaid, though we've been enrolling some of them on a voluntary basis for some time. For now, we expect to enroll between 6,000 and 8,000 new SPD members monthly through May of 2012. As of June 30, 2011, we have approximately 38,000 SPD members, after adding 8,600 new members in June. As we indicated earlier, our full year guidance assumes higher MCRs for this population than for the overall Medicaid program.

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