Health Net Inc. (HNT)

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Call Start: 11:30

Call End: 12:26

Health Net, Inc. (HNT)

Q3 2012 Earnings Call

November 5, 2012 11:30 a.m. ET


Angie McCabe – Vice President-Investor Relations

Jay Gellert – CEO

Joe Capezza – CFO


Chris Rigg – Susquehanna Financial Group

Ana Gupte – Sanford Bernstein

Joshua Raski – Barclays

Sarah James – Wedbush Securities

Ralph Giacobbe – Credit Suisse

Carl McDonald – Citigroup

Justin Lake – JPMorgan

Matthew Borsch - Goldman Sachs

Christine Arnold – Cowen and Company

Kevin Fischbeck – BofA/Merrill Lynch

Peter Costa – Wells Fargo Securities

David Windley – Jefferies

Brian Wright – Monesse, Crispy & Hart



Good morning everyone and welcome to this Health Net Incorporated Third Quarter 2012 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 McKenzie, and thank you all for joining us for a discussion of Health Net’s third quarter 2012 results and agreement with the California Department of Healthcare Services covering our state sponsored health plans.

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 day’s 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 day’s claims payable.

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

Jay Gellert

Thank you Angie. On our second quarter call in August, we outlined a three-step process to get Health Net back on track. I’d like to update you on that and discuss our third quarter performance. First, in terms of our recovery process we highlighted three items in August.

One, we had to address pricing issues in certain commercial, full network, large group accounts totaling about a 100,000 members. Second, there had to be no additional negative prior period reserve development in 2013. And third, we had to stabilize our relationship with the State of California in our Medi-Cal plans including the SPDs.

We’ve made substantial progress on all three fronts since our last call. First, we acted on the issues in the large group accounts. These actions are effective January 1, 2013. Accounts totaling 60,000 members have renewed at an average rate increase of more than 13%. Accounts totaling 35,000 members will not renew on January 1. We do expect some additional in group attrition through 2013 due to our pricing discipline.

As a result of these steps alone, the commercial MCR should improve by 50 to 70 basis points in 2013. In addition, we continue to be disciplined with all other renewals in the commercial book and are willing to absorb additional reductions in unprofitable membership. Second, we had no adverse prior period development in the third quarter.

Our reserves are more than $150 million higher than 3Q ’11 and $20 million higher than Q2 ’12. Adjusted days claims payable is up sequentially and year-over-year. Third, while we are still working with the State on our 2012-2013 rates with the SPDs and initial rates for the dual eligibles, we have come to an agreement with the State on a comprehensive long-term arrangement regarding all of state health plan contracts. This arrangement addresses issues Medi-Cal including the SPDs, the new dual eligible demonstration pilot, and future Medi-Cal expansion.

At its heart this agreement removes a great deal of uncertainty regarding this program and stabilizes it for our current and future Medi-Cal beneficiaries. The agreement also includes provisions for the dismissal of all existing rate related litigation prior to 2011.

For Health Net, we believe we received two important benefits from this agreement. One, we received five-year extensions for each of our existing four Medi-Cal contracts. And two, in line with the State existing, actuarial targets for state-sponsored plans, we’ve developed a mechanism that promotes stability in our State health plan financial performance.

This is especially relevant in the early years of new programs. It also will enhance efficiency and allow for greater investment in new and expanded services for our beneficiaries.

Let’s look at these features in more detail. Health Net currently is managing healthcare services under four Medi-Cal contracts covering seven counties. In addition to dual eligible demonstration pilots in Los Angeles and San Diego counties currently are scheduled to begin in the middle of next year and Medi-Cal expansions are scheduled over the next 15 months.

Under this agreement, Los Angeles County is extended until the end of March 2019, Sacramento through the end of 2018, San Diego through June 2020 and our Central Valley contract covering four counties is extended through the end of 2022. We believe these extensions solidify our Medi-Cal operations, enable incremental investment and reinforce our commitment to the more than one million beneficiaries we presently serve.

Let me now turn to the new process that we believe will promote greater financial stability in the future. This mechanism will be in place for seven years with the State option to extend it under certain circumstances for three additional one year period.

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