Health Net's fourth quarter earnings surpassed the Zacks Consensus Estimate on higher membership gains, supporting the top line. These also helped offset the rise in expenses. Financial position remained strong leading to an enhanced share repurchases. The raised earnings guidance for 2015 is another positive. However, adverse effect of healthcare reforms and customer attrition raise caution. Yet, its strategy of disposing non-profitable businesses, improving liquidity, health plan services, along with stable ratings is commendable. Also, cost saving from Cognizant Technology Solutions alliance is expected to boost profitability. However, the MLR rebate payment and adverse effect of timing of payments can weigh on cash flow. We maintain our Neutral recommendation on the stock.
Based in Woodland Hills, CA, and founded in 1979, Health Net Inc. (HNT) is one of the nation's major publicly traded managed healthcare companies, offering a full range of healthcare services. The company's health plans and government contracts subsidiaries provide health benefits through its health maintenance organizations (HMOs), insured preferred provider organizations (PPOs) and point-of-service (POS) plans to approximately 5.9 million individuals across the country through group, individual, Medicare, Medicaid, TRICARE and Veterans Affairs programs.
Health Net earns revenues in the form of health plan service premiums, government contracts, net investment income and administrative services, fees and other income.
In Dec 2009, Health Net sold its Northeast business, involving the insurance and HMO business in the areas of New York., New Jersey, Connecticut and Bermuda to UnitedHealth. The company received $350 million in cash at the time of closing.
However, after the sale, Health Net continued to show income for the Northeast segment separately in its financial statements as per the administrative services agreement (ASA) made with UnitedHealth. The ASA was terminated on Jul 1, 2011, following which Health Net continued to administer run-out claims under a claims servicing agreement with UnitedHealth.
In Apr 2012, Health Net sold its Medicare stand-alone Prescription Drug Plan business (PDP) to Pennsylvania Life Insurance Company, of CVS Caremark Corporation for $248.2 million.
Revenues and expenses of the Northeast Operations as well as the transition-related expenses associated with the sale of Health Net's Medicare Prescription Drugs (PDP) business are reported under the Divested Operations and Services segment. Apart from Divested Operations and Services, Health Net operates under West Operations and Government Contracts segments.
The Western Region Operations segment includes the operations of commercial, Medicare (including Part D) and Medicaid health plans, the operations of health and life insurance companies as well as behavioral health and pharmaceutical services subsidiaries in Arizona, California and Oregon. The company currently has approximately 2.9 million medical members (including Medicare Part D members) in this segment.
The Government Contracts segment includes government-sponsored managed care plans with the U.S. Department of Defense (DoD) under the TRICARE program for the North Region and other health care-related government contracts. Under the TRICARE contract, Health Net provides administrative services to approximately 2.8 million Military Health System (MHS) eligible beneficiaries. The company also provides behavioral health services to military families under the DoD Military and Family Life Consultant contract.